Handbook of Credit

HANDBOOK ON CREDIT
INDEX
PAGE
Sr. No. TOPIC
NO.
1 PRINCIPLES OF LENDING 2
2 TYPES OF BORROWERS 10
3 PRE-SANCTION APPRAISAL(CREDIT APPRAISAL) 25
4 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS 36

47
5 RATIO ANALYSIS
58
6 BREAK EVEN POINT – AN OVERVIEW
64
7 DOCTORING OF BALANCE SHEET (CREATIVE ACCOUNTING)
71
8 TYPES OF CREDIT FACILITIES
83
9 WORKING CAPITAL FINANCE AND BILL FINANCE
113
10 NON FUND BASED CREDIT FACILITIES
127
11 TERM LOAN APPRAISAL
144
12 DOCUMENTATION
157
13 CHARGING OF SECURITIES
169
14 CREDIT RATING
182
15 CREDIT AUDIT
190
16 PREVENTIVE VIGILANCE
198
17 MICRO SMALL AND MEDIUM ENTERPRISES(MSME) : AN OVERVIEW
203
18 PREPARATION OF CREDIT PROPOSAL IN MCB FORMAT
217
19 MSME PRODUCTS
232
20 RISK ADJUSTED RETURN ON CAPITAL EMPLOYED (RAROC)
237
21 GIST OF CIRCULARS
Baroda Academy 1 Inventing Methods for Igniting Minds updated as on 15.03.2018

1. PRINCIPLES OF LENDING
Quick Bites
Readers would have glimpses of various important considerations for good lending and
foundation of sound credit.
A Bank performs several functions, apart from its one of the most important functions of lending of
money to various types of borrowers. This is also a major source of the bank’s income. However,
lending is not possible without taking a calculated risk.
The borrowers of the bank range from individuals to partnership, companies, LLPs, institutions,
societies etc. There is a wide variety in the nature of their activities, location of their business,
financial health, earning and repaying capacity, purpose of advance, securities, degree of risks etc.
Hence, a banker must take proper precaution in this process. Some of the important considerations
to be kept in mind by the banker in this respect are discussed below as lending principals.
1) Principle of Safety
2) Principle of Profitability
3) Principle of Liquidity
4) Principle of Purpose
5) Principle of Diversity or risk-spread
6) Principle of Security
1) Principle of Safety:
 Bank uses the funds of depositors for extending credit. So banker should primarily
think about the safety of depositor’s money. The purpose behind the safety is to see
the financial standing of the borrower, whether he can repay the debt as well as
interest timely without any default.
 The banker ensures that the money advanced by him goes to the right type of borrower and
is utilized in such a way that it will not only be safe at the time of lending but will remain so
throughout, and after serving a useful purpose in the trade or industry where it is employed,
is repaid with interest.
To ensure the safety of lending, following factors may be considered:
5 ‘C’s of the borrower = Character, Capacity, Capital, Collateral, Conditions
1) Character:
Character implies honesty, integrity, and reputation in the market, business
morality and dependability.
Character is the greatest and the most important asset, which any individual can have. Even if
a borrower has the capacity and capital to repay a loan, it is the character of the borrower
which indicates his intention to repay. If the character or integrity of a borrower is known to
be questionable, every banker would avoid him even if backed by sufficient collaterals.
Character of a borrower is constituted by honesty, sobriety, good habits, personality, the

ability and willingness to keep his promises under all circumstances, reputation of the people

with whom he deals etc.
Character refers to a borrower's reputation or record vis-à-vis financial matters. The old adage
that past behavior is the best predictor of future behavior is one that lenders devoutly
subscribe to. Each has his own formula or approach for determining a borrower's character,
honesty and reliability. But this assessment typically includes both qualitative and quantitative
methods.
More subjective methods include analyzing the debtor's educational background and
employment history; calling personal or business references; and conducting a personal
interview with the borrower.
More objective methods include reviewing the applicant's credit history or score, which credit
reporting agencies standardize to a common scale. It is also termed as credit history. It can
also be accessed through the borrower's credit reports, generated through credit information
companies like Experian, Transunion, CRIF Highmark and Equifax etc. Some agencies like Fair
Isaac Corporation (FICO) use this information to create a credit score, a tool that a lender can
use to get a quick snapshot of creditworthiness before looking at credit reports.
2) Capacity:
Capacity means knowledge of the borrower about his own business and the
ability to conduct the affairs successfully.
Before granting any credit facility, the Banker must be sure that the borrower has the ability
to repay the loan; based on the proposed amount and terms. Capacity is also determined by
analyzing the number and amount of outstanding debt obligations the borrower currently has,
as compared to the amount of income or revenue expected each month.
It deals with the ability of the borrower to manage an enterprise or venture successfully, with
the resources available to him.
For business-loan applications, the company's past cash flow statements will determine how
much income is expected from operations.
Individual borrowers provide detailed information about the income they earn as well as the
stability of their employment. His educational, technical and professional qualifications, his
antecedents, present activity, experience in the line of business, experiences of the family,
special skill or knowledge possessed by him, his past record etc. would give a hindsight into
his capacity to manage the show successfully and repay the loan.
In case of partnership/ proprietary, the banker should also anticipate the problem of
succession, sharing of work amongst promoters. In case of a limited company, a study of the
directors/ key men managing the unit is essential.
Sometimes external factors also affect the income generation capacity of borrower like
 Changes in Government policy.
 Foreign exchange rate variation.
 Competition: Local/ Imported products etc.
Hence, the Banker should always consider such factors while taking any credit decision.

3) Capital:
Capital is the funds to be employed by the borrower in the business.
The Banker should also analyze a borrower's capital level, while determining his
creditworthiness. Capital for a business-loan application consists of personal investment into
the firm, retained earnings and other assets; controlled by the business owner. For personal-
loan applications, capital consists of savings or investment account balances.
Banks will prefer the borrower with a more capital, because that means he has some skin in
the game. Capital involved in the business indicates the borrower's level of seriousness about
the business, which can make lenders more comfortable in extending the credit. If his own
money is involved, it gives the borrower a sense of ownership and provides an added
incentive not to default on his loan. Banks measure capital quantitatively as a percentage of
the total investment cost.
It is also considered as borrower’s ability to meet the loss, if any, sustained in the business or
venture from his own investment or capital without shifting it to his creditor or banker.
4) Collateral:
Personal assets pledged by the borrower as security for a loan are known as collateral. If the
borrower stops making the promised loan payments, the lender can seize the collateral to
recoup its losses. Since collateral offers some security to the lender, loans that are secured by
collateral, typically have lower interest rates than unsecured loans.
Banks measure collateral quantitatively by its value and qualitatively by its perceived ease of
liquidation. Collateral may be required in certain cases depending upon the risk involved in the
proposal or to secure unsecured portion.
5) Conditions:
The conditions of the loan, such as its rate of interest and amount of principal, influence the
Bank's desire to finance the borrower. Conditions refer to how the borrower intends to use the
money.
Sometimes Conditions also considered as any economic conditions that might affect the
borrower. Banks review the conditions such as the strength or weakness of the overall
economy and the purpose of the loan.
Loans/ Credit facilities may be granted / sanctioned / disbursed based on certain terms and
conditions. Hence, the borrower is committed to fulfill all terms and conditions in totality.
Common Sense: Some credit officers also consider Common Sense as the 6th “C” while
appraising a proposal. Person’s inner ability to make wise decisions is often referred to as
common sense. A loan officer or credit manager would determine that you have good
common sense based on how you answer questions (either orally or in writing). Good
decisions are reflected in answers such as reasons for leaving employment, number and types
of credit cards and balances outstanding, or references listed on an application.
If a credit applicant meets all six of the above qualifications, he or she is considered worthy of
credit. The applicant has shown a willingness and ability to pay bills in an acceptable and
responsible manner.

2) Principle of Profitability:
 Profitability is the key word for every business organization and Bank is not the exception to
it. The commercial Banks are not the charitable institutions. All commercial banks are profit-
earning institutions. The ultimate objective of lending is to earn profits.
 Banks must make profits. Firstly, they have to pay interest on the deposits received by
them. They have to incur expenses on establishment, rent, stationery, etc. They have to
make provisions for the depreciation of their fixed assets and also for any possible bad or
doubtful debts. After meeting all these items of expenditure which enter the running cost of
banks, a reasonable profit must be made. Otherwise, it will not be possible to carry anything
to the reserves or pay dividend to the shareholders.
 It is sometimes possible that a particular transaction may not appear profitable in itself, but
there may be some ancillary business available, such as deposits from the borrower's other
concerns or his foreign exchange business, which may be highly remunerative. In this way,
the transaction may on the whole be profitable for the bank
3) Principle of Liquidity:
 Liquidity is an important principle of bank lending. It deals with Bankers ability to get
advance liquidated expeditiously. Liquidity refers to the ability of an asset to convert into
cash without loss within the short time. Paying the deposited money on demand of
customers is called liquidity in sense of banking.
 Banks lend for short periods as they lend public money which can be withdrawn at any time
by the depositors. They, therefore, advance loans on the security of such assets which are
easily marketable and convertible into cash at a short notice. This aspect has now assumed
great importance due to introduction of ALM (Asset Liability Management).
4) Principle of Purpose: -
 The purpose should be productive, so that the money not only remains safe; but also
provides a definite source of repayment.
 If a loan is required for a non-productive or speculative purpose, the banker should be
cautious in entertaining such proposals. Banks discourage advances for hoarding stocks or
for speculative or illegal activities.
 It is very difficult to ensure that the loan has been utilized for the purpose for which it was
sanctioned. Banker should take follow-up measures to ensure the end use of funds exactly
for the same purpose for which it is borrowed.
5) Principle of Diversity or Risk Spread:
 The principle of diversity also applies to the advancing of loans to various types of firms,
industries, businesses and trades.
 Further if the bank lends large amounts to a single industry or borrower, then the default by
that customer can affect the banking industry as a whole and will affect the basic survival of
the industry. To safeguard his interest against all such risks, the banker follows the principle
of diversification of risks based on the famous maxim ‘never keep all the eggs in one
basket’. It should spread it risks by giving loans to various trades and industries in different
parts of the its area of operation.
 Bank should strike a balance between short term, medium term & long-term loans also.

6) Principle of Security:
 It has been the practice of banks not to lend as far as possible except against security. The
security is considered as insurance or a cushion to fall back upon in case of need. At the
same time, it provides for an unexpected change in circumstances which may affect the
safety and liquidity of the advance.
 However, the security and its adequacy alone should not form the sole consideration for
judging the viability of a loan proposal. An advance is granted by a good banker on its own
merits, that is to say with due regard to its safety, likely purpose etc., and after looking into
the character, capacity and capital of the borrower and not only because the security is
good. Apart from the fact that taking of security reserves as a safety valve for an
unexpected emergency, it also renders very difficult, if not impossible, for the borrower to
raise a secured advance from another source against the very security.
 Nevertheless, the security if accepted; must be adequate and readily marketable, easy to
handle and free from encumbrance. It is the duty of the banker to check the nature of the
security and assess whether it is adequate for the loan granted.
Some Bankers also follow the Principle of Stability, Principle of Expediency (Social necessity),
Principle of Suitability, Principle of Viability etc.; which may vary as per the thought process
followed by the Banker.
Some Bankers also opine that there are only a few processes, which should be primarily looked
upon to arrive at a good credit decision i.e.
 Identification of borrower
 Intent of Borrower
 Ability of Borrower
 Stability of Borrower
 Contactability of Borrower
Sources of information available to assess the borrower
 Loan application
 Market reports
 Operation in the account
 Report from other Bankers
 Financial statements, IT returns etc.
 Personal interview
 Unit inspection prior to sanction
 Reports of Credit Information Companies like Transunion, Equifax, CRIF, Experian
 MCA 21, Probe 42, etc.
 RBI Defaulters list and willful defaulters list
 CIBIL suit filed and non-suit filed cases

Test your Understanding:
1. Which of the following is not a part of 5 C’s?
a) Character
b) Capacity
c) Capital
d) Collateral
e) Competitiveness
2. Principle of Risk spread means:
a) Keeping all the eggs in one basket
b) Keeping all the eggs with preservatives
c) Keeping all the eggs in Refrigerator
d) Not to keep all the eggs in one basket
e) Not to buy eggs
3. The deposits are payable on demand or at short notice and hence banker should not lock up
funds in long-term loans. This is governed by the principle of ……..
a) Principle of safety
b) Principle of profitability
c) Principle of liquidity
d) Principle of management
e) Principle of security
4. The educational, technical and professional qualifications, his antecedents, present activity,
experience in the line of business, experiences of the family, special skill or knowledge possessed
by him, his past record etc. would give a hindsight into his …………………. to manage the show
successfully and repay the loan.
a) Character
b) Capacity
c) Capital
d) Collateral
e) Condition

5. Which of the following is part of security appraisal?
a) Durability
b) Transferability of title
c) Stability of value
d) Marketability
e) All of the above
Answers:
1 2 3 4 5
E d c b e

State true or false
True or False
1 Principle of safety of This factor now assumes great importance

funds due to stringent NPA norms
2 Principle of profitability Profit is the result of sound business decision

and is related to cost of funds and other
related risks.
3 Principle of liquidity The deposits are payable on demand or at

short notice and hence banker should not
lock up funds in long-term loans This aspect
has now assumed great importance due to
introduction of ALM
4 Principle of purpose Lending should be for an approved purpose
5 Principle of risk spread Bank should not concentrate advances to

one industry or one field
6 Principle of security Security gives leverage to the lender in case

borrower is not in position to repay the loans
7 Character Character implies honesty, integrity, and

reputation in the market, business morality
and dependability
8 Capacity Capacity means knowledge of the borrower

about his business and ability to conduct the
affairs successfully
9 Capital Capital is the funds to be employed by the

borrower in the business
10 Collateral Collateral may be required in certain cases

depending upon the risk involved in the
proposal or to secure unsecured portion
1 2 3 4 5 6 7 8 9 10
True True True True True True True True True True

2. TYPES OF BORROWERS
Quick bites: This chapter deals with granting of an advance or a credit facility to
borrower- may be an individual, HUF, Sole Proprietorship, Partnership, Limited
Company, LLP, One Person Company, Co-operative Society or any other type of
constituent permissible under law.
1. INDIVIDUALS
As per law, every individual to whom a credit facility is sanctioned must be competent to contract.
Minors, persons of unsound mind and un-discharged insolvents are incompetent to enter into a valid
contract.
MINORS
(i) According to Section 11 of Indian Contract Act, 1872, a minor is incompetent to enter into a
contract and any contract entered into by a minor is VOID ab initio.
(ii) A minor's contract cannot be ratified even on his attaining majority. Further the right to set
off also cannot be exercised in such cases.
(iii) Personal assets if any of the minor offered by him as security for an advance cannot be
enforced by the Bank.
(iv) Even in case of an advance granted to a minor against a guarantee of a third party, the
bank cannot enforce such a guarantee and recover the amount from the guarantor in case of
default by the minor.
(v) No loans/overdrafts can be granted to a minor against any deposit standing in his name.
(vi) Further even in cases where a minor obtains a loan by falsely representing that he is a
major, the bank will not be in a position, legally to recover the loan from the minor after his
attaining majority.
LUNATICS
As per the Indian Contract Act (Section 11) a person of unsound mind (insane) is incompetent to
enter into a contract. As such any contract entered into with such a person is void. The banker,
however, should not rely merely on hearsay information.
DRUNKEN PERSONS
Any contract entered into by a person in a state of intoxication/drunkenness is not a valid contract
and can be declared void. Branches should, therefore, exercise due care while entering into
agreements with such persons.
INSOLVENTS
Bank cannot grant any advance with or without security to an undischarged insolvent (a debtor
adjudicated insolvent) or a person against whom insolvency proceedings are pending.

MARRIED WOMAN
(i) In law, a married major woman is competent to enter into a valid contract. As such, she is liable
for the debts incurred to the extent of her separate estate. Her husband is not responsible for
the debts incurred by her, unless they are for her necessities of life or he has specifically
undertaken to repay them.
(ii) There is no legal bar on the married major woman giving guarantee on behalf of third parties.
PURDANASHIN WOMAN
(i) While considering credit facilities to a purdanashin woman, it is necessary to establish her
identity beyond any doubt branches should endeavour to obtain her latest photograph duly attested
by a person known to the Bank.
(ii) As the burden of proof that a purdanashin lady understood and executed/carried out the
transaction on her own free will lie with the bank, branches should take adequate safeguards such
as the production of proper identification of the parties concerned, obtaining sureties, obtaining
photographs of sureties etc. to protect bank's interests.
BLIND PERSONS AND HANDICAPPED PERSONS

Physically handicapped persons including blind persons, if they are not minors, lunatics or
insolvents, are competent to contract and bank considers granting of credit facilities to them in
normal course after taking appropriate precautions. For further details refer to Book of
Instructions -Deposits - General
JOINT ACCOUNTHOLDERS
(i) Advances can be granted to two or more individuals jointly provided all the joint account
holders are individually competent to contract.
(ii) All the joint accountholders should sign the application as well as the documents for credit
facilities. Unless all of them agree in writing, authority to either or any one of the joint
accountholders to operate on credit balance in an account does not extend to the borrowings.
(iii) Even though according to Indian Contract Act, 1872, a creditor can, in the absence of an
express agreement to the contrary, call upon any one or more of the joint debtors to repay the
debt, joint and several liability of all the joint accountholders should expressly be established, which
would only give the Bank the right of action and the right to set-off individual accounts of joint
parties against indebtedness in the joint account, subject, of course, to the right of a reasonable
notice or unless release is expressly made.
(iv) Where the share/securities are standing in joint names, the relative transfer
deeds/endorsements should be signed/made by all the parties to the same. Clear and precise
instructions should be obtained as regards withdrawal/delivery of shares/securities, operations in
the account etc.
(v) In the event of death, lunacy or insolvency of one or more joint borrowers, all operations in
the account should be stopped and instructions be sought from the Regional Authority either for
recovery of the dues or for continuance of the facility/ies to the remaining accountholders. The
estate of the deceased borrower is not released from the charge in respect of borrowings prior to
his death.
2. SOLE PROPRIETORSHIP FIRMS
A sole proprietorship firm is one which carries on the business in the sole name of the individual
owner (proprietor) or in the trade name of the firm.
When an individual decides to venture into a business, then a simple form of business to set up is a
Sole Proprietor. To illustrate the difference between sole proprietor and sole proprietorship, let us
take an example - Mr. Raman start a business of readymade garment in the name of Fashion

World. The sole proprietor is Mr. Raman. The name of sole proprietorship business is Fashion
World. As per KYC guidelines, we are required to obtain documentary evidences (i.e. including
registration of firm with respective authority under Shop & Establishment Act, GST Registration
etc.) to ensure that the proprietorship firm is actually in existence.
As far as signing or execution of loan documents is concern, it is a common practice to sign and
affix the rubber stamp in the name of business (i.e. proprietor is to sign in the capacity of proprietor
as well as in individual capacity) . In case of a sole proprietorship firm, branches must obtain a
declaration (LDOC-38) from the sole proprietor in his personal capacity that he is the sole proprietor
of the firm and that he is solely responsible for its liabilities. Other documents should be executed
by him as the sole-proprietor of the firm and also in his personal capacity.
A borrower may be an individual, HUF, Sole Proprietorship, Partnership, Limited Company, Co-
operative Society or any other type of constituent permissible under law, subject to compliance of
relevant formalities and on fulfillment of bank’s eligibility criteria and other loan specific terms and
conditions.
However, as per guidelines (Circular No. BCC: BR: 98 / 203 dated 01.07.2006) providing any credit
facilities where HUF is shown as a partner in a partnership firm, should not be considered at all. As
regards HUF, in one of the judgments the Supreme Court has expressed that HUF cannot enter into
a contract due to floating nature of the organization as its composition changes by births, deaths,
marriages & divorces. Bank should desist from accepting HUF as borrower (proprietor/ partner) or
guarantor.
As per our Bank Loan Policy 2014 the constitution of an entity is also a determining factor for
deciding maximum exposure our bank can take on them. Maximum aggregate credit facility to
Individual/ Proprietor as borrower can be of Rs. 25 Crore aggregate of fund based and non-fund
based (Other than facilitates against specified securities for which there is no restriction but
including off balance sheet derivative exposure).
3. PARTNERSHIP FIRMS
A Partnership is an association of two or more persons to do a business for profit, like a sole
proprietorship. It is a firm with no legal entity; however the partnership business is governed by the
Indian Partnership Act, 1932.
 While the Act is in place, it is a common practice for the firms to draw up their own Partnership
Deed. In absence of partnership deed, the Partnership Act will prevail.
 To enter into a partnership, there has to be a contract which may be oral or in writing. Being a
legal contract, persons having legal capacity to contract (minors, insolvents, alien enemy
excluded) only can enter into a partnership.
 The number of partners in a partnership firm should not exceed ten, if it is engaged in banking
business and twenty in other cases.
 There are no restrictions on the borrowing powers of a partnership firm. The firm need not be a
registered one for granting advance facilities. However As per our Bank Loan Policy 2014 the
constitution of an entity is also a determining factor for deciding maximum exposure our bank
can take on them. Maximum aggregate credit facility to Non-Corporate (Partnership, Trust, JHF
& Associations) as borrower can be of Rs. 100 Crore aggregate of fund based and non-fund
based (Other than facilitates against specified securities for which there is no restriction but
including off balance sheet derivative exposure). This ceiling will also be applicable to the
aggregate of all facilities sanctioned to partnership firms which have identical partners.
 No partner should be a lunatic or un-discharged insolvent and no other partnership firm should
be a partner in another firm.
 As per Section 32 of Indian Partnership Act 1932, a minor can be admitted to the benefits of a
partnership with the consent of all the partners but he will not be liable for losses of the firm.
Within six months after he attains the majority, the minor has an option to repudiate his liability
as a partner otherwise will be held liable as a partner of the firm, from the date he was admitted
for the benefits of partnership. As such the minor should not be mentioned as a full fledge
partner and neither his nor his guardian's signature obtained on security documents.
 Joint Stock Company/ Trust can become the partner in a firm and in such cases the bankers
need to ensure that they are eligible to become the partner.
Action on the part of Lending Bank in case of Admission of a new partner/ Dissolution of
the firm (Mutually, Death/insolvency/ retirement/ operation of law) when the account
is showing debit balance-
- On receipt of notice of retirement of a partner, branches should stop operations in the

account to determine the liability of the retiring partner. Where the partnership assets
charged to the Bank are sufficient to cover the outstanding dues without the necessity of
looking to the retiring partner, the account may be continued pending new arrangements.
- When the account of the reconstituted firm is opened, fresh documents should be obtained
and thereafter the outstanding balance in the old account be adjusted by a cheque drawn
on the new account and signed jointly by all the partners of the reconstituted firm or by
obtaining a letter of authority signed by all the partners.
- Death of a partner dissolves the firm and the surviving partners can act only for winding up
of the firm in the absence of an arrangement to the contrary. Estate of the deceased partner
is not liable for the debts contracted subsequent to the date of the death. Branches should
stop operations in the account to determine the liability of the deceased partner.
- Change in the constitution of the firm should invariably be brought to the notice of the
sanctioning authority and instructions sought for the continuance of the facilities to the
reconstituted firm along with full details and the position of the firm consequent to the
death/retirement of a partner. Impact of reconstitution of the firm on its capital structure
and management should be studied carefully.
- On receipt of notice of death, retirement or insolvency, exclusion or inclusion of a partner

the branches should treat the limit granted to the old firm as cancelled and extension of
credit facilities to the new (reconstituted) firm be considered afresh after reviewing the
credit worthiness of the reconstituted partners and all other relevant factors having a
bearing on the grant of advances.
- However, with a view to ensuring that the activities of the firm, are not affected and that
they continue to have dealings with the bank till all the formalities are completed, the firm
may be allowed to operate on their existing accounts after obtaining a stamped indemnity
signed by all the partners including the partners who has/have joined/ retired. In cases
where the facility is secured by way of a third party guarantee, the concerned, guarantor
should be advised of the Bank's action in the matter as indicated above and their
confirmations obtained before operations are allowed on the accounts.

4. Company
In terms of the Companies Act, 2013, ‘company’ means a company incorporated under the Act, or
under the previous company law [Sec. 2(20)]. The companies Act, 2013 recognizes a joint stock
company as a legal person, due to which it is a separate legal entity. Unlike a partnership, a
company is a corporate body and a legal person having status and personality distinct and separate
from that of the members constituting it.
Where a company has one or more subsidiaries, it shall, in addition to its own financial statements
prepare a consolidated financial statement of the company and of all the subsidiaries in the same
form and manner as that of its own
Few important characteristics or advantage of company is;
 Limited Liability: The privilege of limiting liability for business debts is one of the principal
advantages of doing business under the corporate form of organization. No member is
bound to contribute anything more than the nominal value of the shares held by him.
 Perpetual succession: An incorporated company never dies. It is an entity with perpetual

succession. Perpetual succession, means that the membership of a company may keep
changing from time to time, but that does not affect the company’s continuity. The death or
insolvency of individual members does not, in any way affect the corporate existence of the
company. Members may come and go but the company can go on forever. It
continues to exist even if all its human members are dead.
 Separate property: A company, being a legal person, is capable of owning, enjoying and
disposing of property in its own name. The company becomes the owner of its capital and
assets.
 Transferable Shares: When joint stock companies were established the great object was
that their shares should be capable of being easily transferred. Accordingly, the Companies
Act, 2013 in Section 44 declares: ‘The shares or debentures or other interest of any member
in a company shall be movable property, transferable in the manner provided by the articles
of the company.
 Common seal: Since the company has no physical existence, it must act through its agents
and all such contracts entered into by its agents must be under the seal of the company.
The common seal acts as the official signature of the company. Prior to the Companies
(Amendment) Act, 2015 the common seal is a seal used by a corporation as the symbol of
its incorporation and also a statutory requirement for a company. As a departure from this
concept, the Companies (Amendment) Act, 2015 has deleted the requirement of having
Common Seal compulsorily. After this amendment, in case a company does not have a
common seal, the authorization shall be made by two directors or by a director and the
Company Secretary, wherever the company has appointed a Company Secretary.
 Prior to the Companies (Amendment) Act, 2015, Section 11 of the Companies Act, 2013
seeks to provide that a company having a share capital shall not commence any business or
exercise any borrowing powers only after fulfilment of certain conditions. However, the
Companies (Amendment) Act, 2015 has done away with this requirement.

Companies may be classified into various classes on the following basis:
On the Basis of Incorporation
a) Statutory companies: These are the companies which are created by a special Act of the
Legislature, e.g., the Reserve Bank of India, the State Bank of India, the Life Insurance
Corporation, the Industrial Finance Corporation, the Unit trust of India and State Financial
Corporations These are mostly concerned with public utilities, e.g. railways, tramways, gas
and electricity companies and enterprises of national importance. The provisions of the
Companies Act, 2013 do not apply to them unless the special act specifies such application.
Banking Regulation Act, 1949 is a special legislation concerning banking companies.
b) Registered companies: These are the companies which are formed and registered under the
Companies Act, 2013, or were Registered under any of the earlier Companies Acts.
On the basis of liability
a) Company limited by shares
Section 2 (22) of the Companies Act, 2013, defines that when the liability of the members of a
company is limited by its memorandum of association to the amount (if any) unpaid on the shares
held by them, it is known as a company limited by shares. It thus implies that for meeting the debts
of the company, the shareholder may be called upon to contribute only to the extent of the amount,
which remains unpaid on his shareholdings. His separate property cannot be encompassed to meet
the company’s debt.
b) Company limited by guarantee
Section 2 (21) of the Companies Act, 2013 defines it as the company having the liability of its
members limited by the memorandum to such amount as the members may respectively undertake
by the memorandum to contribute to the assets of the company in the event of its being wound up.
Thus, the liability of the member of a guarantee company is limited up to a stipulated sum
mentioned in the memorandum. Members cannot be called upon to contribute beyond that
stipulated sum.
c) Unlimited company
Section 2 (92) of the Companies Act, 2013 defines unlimited company as a company not having any
limit on the liability of its members. In such a company the liability of a member ceases when he
ceases to be a member.
The liability of each member extends to the whole amount of the company’s debts and liabilities but
he will be entitled to claim contribution from other members.
On the basis of members
One Person Company
The concept of One Person Company (OPC) has now been introduced in India, through Section 2
(62) of Companies Act, 2013 thereby enabling Entrepreneur(s) carrying on the business in the Sole
Proprietor form of business to enter into a Corporate Framework. Though this concept is new in
India but it is already a part of many other countries like China, Australia, Pakistan and UK etc.

According to Section 2 (62) of the Companies Act, 2013 ‘One Person Company’ means a company
which has only one person as a member. One Person Company is a hybrid of Sole-Proprietor and
Company form of business, and has been provided with concessional/relaxed requirements under
the Act. As regards the name of a One Person Company, the Act provides that the words “One
Person Company” shall be mentioned in brackets below the name of such Company, wherever its
name is printed, affixed or engraved.
 Only One Shareholder: Only a natural person, who is an Indian citizen and resident in India,
shall be eligible to incorporate a One Person Company.
 Nominee for the Shareholder: The Act provides that the Memorandum of One Person
Company shall indicate the name of the other person as nominee, with his prior written
consent, who shall become the shareholders in case of death/incapacity of the original
shareholder and the written consent of such person shall also be filed with the Registrar at
the time of incorporation along with its Memorandum and Articles. Such other person may
withdraw his consent in prescribed manner. The name of the nominated person may be
changed by the member of the OPC and the Company to intimate the Registrar of any such
change.
 Director: Must have a minimum of One Director, the Sole Shareholder can himself be the
Sole Director. The Company may have a maximum number of 15 directors
PRIVATE LIMITED COMPANIES
Defined u/s 2(68) of Companies Act 2013:
“Private company” means a company having a minimum paid-up share capital as may be prescribed
and which by its articles-
(i) Restricts the right to transfer its shares;
(ii) Except in case of One Person Company, limits the number of its members to Two
Hundred;
Provided that where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this clause, be treated as a single member;
{As per the Companies (Amendment) Act, 2015 the words “of one lakh rupees or such higher paid-
up share capital” are omitted from the definition of Private company}
Provided further that-
(A) Persons who are in the employment of the company; and
(B) Persons who, having been formerly in the employment of the company, were members of
the company while in that employment and have continued to be members after the
employment ceased, Shall not be included in the number of members; and
(C) Prohibits any invitation to the public to subscribe for any securities
 There should be minimum 2 directors and its name must end with the words “private limited”.
 A private Limited company can start business on receiving certificate of incorporation and need
not to wait for certificate of commencement of business.

 The Companies (Amendment) Act, 2015 has omitted the words of “of one lakh rupees or such
higher paid-up share capital” from the definition of Private Company w.e.f. 25.05.2015. The
impact of this amendment is that today one can have a company of paid up capital of mere
rupees Two (with each subscriber giving a rupee as subscription) for a private company and
rupees Seven for a public company
 The shares of private limited companies are not quoted in the stock market and there is
restriction on right of transfer of the shares. The public is not invited to subscribe the shares.
PUBLIC LIMITED COMPANIES
Public company is defined in section 2(71) of the Companies Act 2013 and it means a company
which-
a. is not a private company;
b. has a minimum paid-up capital as may be prescribed; Further, the act states that a private
company which is a subsidiary of a company which is not a private company shall be
deemed to be a public company for all purposes under the Companies Act 2013.
{As per the Companies (Amendment) Act, 2015 the words “of five lakh rupees or such higher paid-
up capital” are omitted from the definition of Public company w.e.f. 25.05.2015}
 Public limited companies must have minimum three directors and seven shareholders.
 Public Limited can invite/ transfer shares to or from public and such shares are quoted in stock
market
Small Company:
According to Section 2 (85) of Companies Act, 2013 a ‘‘small company’’ means a company, other
than a public company:
i. Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as
may be prescribed which shall not be more than five crore rupees. Or
ii. Turnover of which as per its last profit and loss account does not exceed two crore rupees or
such higher amount as may be prescribed which shall not be more than twenty crore
rupees:
Provided that nothing in this clause shall apply to:
a) A holding company or a subsidiary company.

b) a company registered under Section 8, or
c) a company or body corporate governed by any special Act
Some of the advantages enjoyed by the small companies are:
a) Holding of two board meetings instead of four – one each in the first and second half years and
the gap between the two meetings should not be more than 90 days. (Section 173(5))
b) Not required to give cash flow statements with the financial statements (section 2(40))
Important Documents in respect of limited companies:

 Memorandum of Association (MOA)
It should contain following clauses:
 The name of the proposed company — it should be the same as given in the name approval letter.
 Domicile of the company; i.e., the state in which the proposed company is sought to be registered.
 The Objects clause of a company is now not required to be divided into main, ancillary and other
objects. Only the objects for which the company is incorporated along with matters considered
necessary for its furtherance to be mentioned. The company cannot provide for other object clause.
 The Capital Clause should show the Authorized Capital of the company, in case the company is
being registered with share capital. It should also state that the paid-up capital of the company. In
case the liability of the members is limited, the same should be mentioned in the Memorandum of
Association. The Stamp Duty and ROC fees are payable based on the Authorized Capital.
 The Subscription clause should be signed by all the subscribers (Minimum two in case of Private
Company, Seven in case of Public Company and one person in case of OPC) and mentioning in their
own handwriting, name, address, occupation and number of shares agreed to be subscribed before
a witness. Witness also has to write his details in his own handwriting. The memorandum of a One
Person Company shall indicate the name of the other person, with his prior written consent in the
prescribed from, who shall, in the event of the subscriber’s death or his incapacity to contract
become the member of the company and the written consent of such person shall also be filed with
the registrar at the time of incorporation of the One Person company along with its memorandum
and articles.
 The Liability clause should mention the fact that the liability of the company is limited (by shares or
by Guarantee as the case may be). In case of company limited by shares , the liability clause of the
Memorandum shall provide the liability of its members to be limited to the amount unpaid, if any,
on the shares held by them (including premium if any) contrary to the Companies Act, 1956
wherein it was limited to the amount unpaid on the face value of the shares.
 Articles of Association (AOA)
The articles of a company shall contain the regulations for management of the company. It is a
document of indoor management– For all companies, to the extent applicable:
 A/A, if filed, may contain clauses like capital structure, power to issue further shares, make call,
forfeit, issue bonus shares, or buy back of shares including power to increase, convert, cancel,
consolidate and/or spilt the shares etc.
 A/A must not be ultra vires the Act or the M/A.
 The relationship of promoters inter se or rights — powers duties of each promoter may be described
in A/A.
 Any MoU or shareholders agreement etc. between promoting groups may be suitably referred to in
A/A, if it is desired that company should take cognizance of such MoU etc.
 The method and mode of valuation of shares, further allotment etc., if desired, may be enclosed in
A/A.

 Minimum/maximum number of Directors, their rights, and duties can be contained in A/A.
 Appointment/Reappointment, Retirement, Remuneration of Directors may also be mentioned in A/A.
Other important points to remember:
 It has now been specifically provided that any provision in the Memorandum or Articles of the
Company, in the case of Companies limited by guarantee and not having a share capital,
purporting to give any person a right to participate in the divisible profits of the company otherwise
than as a member, shall be void.
 Certificate of incorporation is birth certificate of a company and is issued by the Registrar of

Companies to all types of the companies i.e. private and public etc. It is conclusive evidence that all
formalities in formation of a company are duly complied with.
 Where a company has one or more subsidiaries, it shall, in addition to its own financial statements
prepare a consolidated financial statement of the company and of all the subsidiaries in the same
form and manner as that of its own.
 Certificate of commencement of business was also issued by the Registrar of Companies to all public
limited companies after ensuring that the minimum capital required by the company is subscribed
the public. Now after Notification G.S.R.464 (E) dated 05 June 2015 same is not required anymore.
 Resolutions of the Board (LDOC-75 to 79, 100 and/or 131, as the case may be): shareholders are
the owners of the company but a company functions through its Boards of Directors (who represent
shareholders and all the decisions are taken by the Board (no one else authorized to take decision
of the company. For raising a loan a resolution should be passed in duly meeting of the board.
Action on the part of the bankers while granting credit facility to the limited companies-
 A banker must obtain and verify the copies of MOA, AOA, and Certificate of Incorporation to see
that the borrowing is for the objective of the company and board of directors has power to borrow.
 Borrowing powers of the company arise due to objective clause in MOA. The borrowing powers of
the Board are stated in AOA. In case of public limited company and a private limited company,
which is a subsidiary of a public limited company where such company borrows in excess of the
paid-up capital and free reserves with the consent of the general meeting, a certified true copy of
the resolution passed at the meeting should be obtained.
 As per the Section 77 of the Companies Act, 2013 it shall be duty of every company creating a
charge within or outside India, on its property or assets or any of its undertakings, whether tangible
or otherwise, and situated in or outside India, to register the particulars of the charge signed by the
company and the charge holder together with the instruments, if any, creating such charge in such
form, on payment of fees.
 Section 77 provides for registration of a charge within a period of 30 days after the date of its
creation. Provided that the Registrar may, on an application by the company, allow such registration
to be made within a period of three hundred days of such creation on payment of such additional
fees as may be prescribed.
 If the charge is not registered within 300 days of such creation, the company shall seek extension
of time in accordance with section 87.
 Section 78 states that the person in whose favour the charge is created may apply to the Registrar
for registration of the charge along with the instrument created for the charge, within such time and
in such form and manner as may be prescribed and the Registrar may, on such application, within
14 days after giving notice to the company, unless the company itself register the charge or shows
sufficient cause why such charge should not be registered, allow such registration on payment of
such fees, as may be prescribed.
 If charge is registered on application of the person in whose favour the charge is created, that
person shall be entitled to recover from the company the amount of any fees or additional fees paid
by him to the Registrar for the purpose of registration of charge.
 Any omission to register the charge will make it void as against the liquidator and any creditor of
the company and make the charge holder an unsecured creditor.
 Herein, we give the extract from the Companies (Registration of Charges) Rules, 2014:
I. For registration of charge u/s 77 of Companies Act 2013, the particulars of the charge
together with a copy of the instrument, if any, creating or modifying the charge in Form No.
CHG-1(other than debentures) or Form No. CHG-9 (for debentures), as the case may be
duly signed by the company and the charge holder and filed with the Register within a
period of thirty days of the date of creation or modification of charge along with the fee.
II. If the particulars of a charge are not filed within the aforesaid period, but filed within a
period of three hundred days of the date of such creation or modification, the additional fee
shall be levied.
 The supplementary agreements for increase in hypothecation limit, additional security etc. should
also be registered.
 The period of limitation will commence from the date of creation of the charge (i.e. date of the
documents) and not from the date of signing the Form CHG 1 (earlier form no 8) (G.S.R. 284 (E)
dated 24th April 2009 of Ministry of Corporate Affairs). (R)
 Affixation of Common Seal of the company on various loan documents should be in the manner
prescribed in Article of Association. The resolution for affixation of common seal should be passed
in conformity with the seal clause and the affixation of common seal to the documents should be
accordingly.(R) As per the Companies (Amendment) Act, 2015 the Use of Common Seal is
now optional.
 No company, whether public or private can give any loan(including loan represented by book debt)
or provide any security or guarantee in connection with a loan to a Director or any other person in
whom he is interested, except as provided in Section 185(1)(a). Section 185 has been amended
vide Notification G.S.R.464 (E) dated 05 June 2015 and now it says that it Shall not apply to
private companies -
a) in whose share capital no other body corporate has invested any money;
b) if the borrowings of such a company from banks or financial institutions or anybody corporate
is less than twice its paid up share capital or fifty crore rupees, whichever is lower; and
c) Such a company is not in default in repayment of such borrowings subsisting at the time of
making transactions under this section.
5. CLUBS, ASSOCIATIONS AND SOCIETIES
a. As unregistered societies cannot be sued in law, credit facilities should be considered

only to clubs, and societies which are registered under the Societies Registration Act, 1860 or the
Companies Act, 1956 or the State Co-operatives Act.

b. Clean advances to clubs and associations should not be considered and the secured facilities
may be considered in special cases after obtaining the approval of the Regional Authority.
c. The committee members, both existing and future, should guarantee the facility sanctioned
in their personal capacity. This is to ensure that the committee members take personal interest in
liquidating the advances granted.
d. The clubs and associations should pass a resolution (as per LDOC-81) and submit a certified
true copy to the branch. However, branches should ensure that the borrowings and charging
of securities are in conformity with the provisions contained in the bye-laws.
6. TRUSTS
 Advances should be considered only for registered trusts.
 Trust deed should confer specific powers to the trustees to borrow for the purpose of the trust
and also to charge its assets.
 Advances to the trust should be guaranteed by all the trustees in their personal capacity.
Permission of the Charity Commissioner should be obtained wherever necessary. The trust
should pass a resolution (as per LDOC-82) and submit a certified copy to the branch.
 Advances to trusts should be considered only after obtaining prior approval of the Regional
Authority
7. LIMITED LIABILITY PARTNERSHIP [LLP]
With the growth of Indian economy, the role played by its entrepreneurs as well as its technical and
professional manpower has been acknowledged internationally. In this background, a need was felt
for a new corporate form that would provide an alternative to the traditional partnership which
exposes its partners to unlimited personal liability and a statute based governance structure of
limited liability companies.
Limited Liability Partnership [LLP] is viewed as an alternative corporate business vehicle that
provides the benefits of the limited liability but allows its members the flexibility of organizing their
internal structure as a partnership based on a mutually arrived agreement.
Every LLP shall have at least two partners. The following persons can be partners in LLP:
 Individuals
 Limited Liability Partnerships
 Companies
 Foreign Limited Liability Partnerships
 LLPs incorporated outside India
 Foreign Companies
 Karta representing a Hindu Undivided Family can be a partner. However, the Act is not clear in
respect of admission of HUF as partner. Since an HUF is neither a person nor a legal entity, in
the opinion of bank’s guidelines vide Circular No.BCC / BR /102/139 dated 17.05.2011, it
cannot be taken as a partner. A Cooperative society, Society and Corporation can also not be
member of LLP. Obviously, minor, a person of unsound mind and undercharged insolvent
cannot be admitted as partner of LLP as they lack capacity to contract.

Care Before Granting Credit Facilities to LLP
a. The branches should verify the LLP Agreement which is the main document governing the
relationship between the partners inter se and partners and the LLP.
b. Resolution for borrowing and execution of documents would be a must notwithstanding that
common seal for LLP is optional.
c. Execution of documents on behalf of LLP shall be either under common seal or under the signatures
of the authorized partners signing for and on behalf of the LLP as may be resolved.
d. Signature of each and every partner is not required in the documents executed on behalf of LLP as
LLP is a corporate entity.
e. Since the number of partners would be unlimited binding each and every partner personally may
not be feasible.
f. Personal Guarantee of the partners having majority shareholding can be stipulated and obtained.
g. A major problem that banks may have to face would be in respect of encumbrances over the LLP
assets as there is no provision of registration of charges with ROC unlike a limited Company.
h. Further, since the partners would not be personally liable except to the extent of his/her share in
the LLP, to protect the interest of the bank, sanctioning authority may stipulate for personal
guarantees of partners and mortgage of their personal assets in addition to the LLP assets
depending on the credit decision.
i. Before financing an LLP branches to inspect thoroughly the registers of LLP containing the number
and names of partners, the pattern and extent of liability of partners, the charges created on LLP
assets, the amount of insurance coverage on LLP assets, Books of Account of LLP, Annual Return
and Statement filed with ROC etc.
Local Authorities-
The essential fact to remember while dealing with a local authority is that it is the creation of a
statute which governs its borrowing powers. The banker, before making an advance to any local
authority, ascertain whether it has the power to borrow under statute, the limitations on that
power, the authorized form/forms of borrowing, the security which can be offered, the maximum
permissible rate of interest and whether the sanction of the Government or any other appropriate
authority is necessary. After looking into all these points with the help of legal advice, it would be
necessary to get a resolution passed by the local body in accordance with its constitution. It follows
that if the formalities attendant on the borrowings by a local authority are not complied with, the
advance would become ultra vires of the local authority concerned and may consequently be
irrecoverable. Since a number of legal technicalities are involved, proper legal advice would have to
be taken before entertaining an advance proposal from a local authority.
%%%%%%%%%

State true or false
Sr No Statement T/F
1 It is compulsory that common seal should be affixed on loan documents of Private

limited company.
2 Section 180 is not applicable to the Private limited company
3 One Person Company” means a company which has only one person as a member
4 A holding company or a subsidiary company can be a small company
5 Private limited company should have minimum paid capital of Rs. 1.00 lacs.
6 Certificate of commencement of business is compulsory for Public Ltd company
7 Partners have unlimited liability in LLP
8 Public limited company should have minimum paid capital of Rs. 5.00 lacs.
9 Form No. CHG-1 is filed for charge registration of debentures
10 None of the Private Limited company can offer corporate guarantee under section
185.
11 A Private limited company cannot accept deposit from public.
12 Form No. CHG-1 is filed for charge registration of Bank loan
13 Signature of each and every partner is not required in the documents executed on
behalf of LLP as LLP is a corporate entity
14 Section 77 provides for registration of a charge within a period of 30 days after the
date of its creation. Provided that the Registrar may, on an application by the
company, allow such registration to be made within a period of three hundred days
of such creation on payment of such additional fees as may be prescribed
15 The person in whose favor the charge is created may apply to the Registrar for
registration of the charge along with the instrument created for the charge, within
such time and in such form and manner as may be prescribed and the Registrar
may, on such application, within 14 days after giving notice to the company, unless
the company itself register the charge or shows sufficient cause why such charge
should not be registered, allow such registration on payment of such fees, as may
be prescribed
16 Private limited company may accept deposit from the members to the extent of
100% of its paid up capital and free reserves
17 The period of limitation for charge registration commence from the date of creation
of the charge (i.e. date of the documents) and not from the date of signing the
Form CHG 1

18 The Objects clause of a company is now not required to be divided into main,
ancillary and other objects
19 Any omission to register the charge will make it void as against the liquidator and
any creditor of the company and make the charge holder an unsecured creditor
20 Form No. CHG-4 is filed for satisfaction of charge of Bank loan
1 2 3 4 5 6 7 8 9 10
False True True False False False False False False False
11 12 13 14 15 16 17 18 19 20
True True True True True True True True True True

3. PRE-SANCTION APPRAISAL(CREDIT APPRAISAL)
Quick Bites:
Pre-Sanction Appraisal or Credit Appraisal is a critical part of the sanction. This chapter
deals with various components of Credit appraisal i.e. Borrower Appraisal, Technical
Appraisal, Management Appraisal, Financial Appraisal, Economic Appraisal, Market
Appraisal and Environmental Appraisal; Borrower Appraisal– 5Cs Character, Capacity,
Capital, Collateral and Conditions; and Precautions/Due diligence in Takeover
proposals.
WHAT IS PRE-SANCTION APPRAISAL?
When a credit proposal is received from a prospective borrower for sanction by an appropriate
authority, the appropriate authority on the basis of careful analysis of various facts and data
presented by the borrower may either sanction or reject the proposal. The decision to sanction or
reject the proposal has to be based on a careful analysis and in-depth study of various facts and
data presented by the borrower concerning him and his project. Such an in-depth study is called
the pre-sanction credit appraisal. It provides the sanctioning authority with the reasons and
justifications for either sanctioning or rejecting a credit proposal. It, thus, helps in the decision
making process of the sanctioning authority. Here, the Banker must keep in mind that this appraisal
should be realistic and not pessimistic or cynical in nature.
The pre sanction appraisal is necessary to get answer of following questions, while considering a
credit proposal.
 HOW IS THE BORROWER?

 WHY CREDIT IS REQUIRED?
 HOW MUCH DOES HE REQUIRE?
 WHAT TERMS /CONDITIONS FOR BORROWER?
 WHAT IS THE SECURITY?
 HOW IS HE GOING TO USE THE CREDIT?
 HOW IS HE GOING TO REPAY?
The entire process of credit appraisal can be segregated into 7 sections is under:
1. Borrower Appraisal
2. Technical Appraisal
3. Management Appraisal
4. Financial Appraisal
5. Economic Appraisal
6. Market Appraisal
7. Environmental Appraisal

1. BORROWER APPRAISAL
Every credit proposal, howsoever, small or big, is sponsored either by an individual, group of
individuals or a body run by individuals. A project which may be considered technically feasible,
economically viable and financially sound may run into difficulties if it is not backed by a competent
person who will be manning the enterprise. Thus, the man behind the project is very important.
Confidence is the basis of all credit transactions. The basis of this confidence is generally derived
from the 5 'C's of the borrower i.e.
1. Character
2. Capacity
3. Capital
4. Collateral
5. Conditions.
In additions to the 5 C's reliability, responsibility and resources are also looked into for gaining the
confidence. These 5 C’s have been elaborated in previous chapter.
 Succession planning:
It is also to be satisfied that the unit has in its fold adequately groomed/trained. Normally when we
receive the proposals we may guess about the nature of project. The project may run for short
period or for longer period. In both the cases succession plan is required, but in later case it is more
important. In the big proposals works/responsibilities should be in the way that in case of any
causality the project should not be shut down for a long time. Absence of the key persons wills
adversely affected the project in various area.
So the second line of key persons to run its business is necessary.
 Credit report on borrower
Having decided about the qualities as above, that are to be looked for in a borrower the question
that arises is how can a branch obtain/gather the necessary information regarding these qualities.
The following are the sources from where these can be obtained:
a. Application form- A careful study of the information given by the borrower in application
form for credit facilities and cross checking the same with documentary evidence wherever
required, would give the bank a detailed knowledge about the background of the borrower
and indicate the further investigations required. Verification of the ration card, driving
license, income-tax, wealth tax returns etc. gives valuable information about the means of
the borrower .About the proposed borrowers who are residing on rent, a careful study about
their permanent residence is must during pre sanction inspection.
b. Borrower's past dealings with the branch in conduct of various deposit accounts or
repayment of earlier loans if any, would give a clue about his honesty and character.
c. Reports obtained from persons having dealings, links with the borrower:
Borrowers' creditors constitute a very important source of information about the credit
worthiness of the borrower. The suppliers of goods and customers of the borrowers would
also provide useful information on the reputation of borrower.
d. Reports from the guarantors: The guarantors who have offered to stand as surety for
the borrower would not agree for the same unless they have faith about the borrower to
repay the loan
e. Reputation in the society or community to which he belongs: A discreet enquiry with
some members of the community or society to which the borrower belongs usually proves a
reliable source of information
f. Credit information from other banks and financial institutions with whom he is
having dealings- It is a practice among banks to exchange credit information and credit
opinion on the standing of their customers/borrowers. Such reports/opinions are generally
conveyed in general terms. An acknowledgement letter should be sent thanking for issuance
of the report. The Indian Bank's Association has suggested a uniform format for submission
of credit information by banks. The Performa of the suggested IBA format is available in old
BOI Vol. 5 Chapter –I, appendix 1 at page 26.
g. Credit Information Bureau of (India) Ltd (TRANSUNION CIBIL): CIBIL credit

reports are important source of information about financial dealings of borrower with banks/
financial institutions/ credit card companies. Various reports are available in CIBIL 1.
Consumer 2. Commercial 3. Detect 4. Mortgage Check & 5, CIBIL Express acquire. List of
suit filed cases of all banks is also available on CIBIL website. You see “Not Disclosed” on
the report you have and want more information then same can be verified from CIBIL
website
h. Equifax: Similarly on the line of CIBIL, Credit reports can be obtained from Equifax also.
Equifax India is registered as Equifax Credit Information Services Private Limited (ECIS). It is
a joint venture between Equifax Inc., USA and seven leading Indian financial institutions -
State Bank of India, Bank of Baroda, Bank of India, Kotak Mahindra Prime Limited, Religare
Finvest Limited, Sundaram Finance Limited and Union Bank of India. Equifax India aims to
provide a broad range of solutions related to credit information, business analytics and risk
management across India. Equifax is providing information on: Basic Consumer Information
Reports, Enhanced Consumer Information Reports, Microfinance Institution Credit
Information Report and Equifax Alerts.
i. CRIF and EXPERIAN: These are other two Credit Information Companies (CICs); which
are authorized by RBI, for credit information provision purpose.
j. The critical information regarding due diligence done by the branch official who have done
pre sanction inspection/ appraisal is to be incorporated in proposal which enables the
Competent Authority to arrive at a logical conclusion.
As per circular no. BCC:BR:104:310 dated 31st August, 2012, The due diligence should
interalia include the followings:
 The branch official should contact the present major bankers to know about the conduct
of the account.
 Market report should be obtained from our existing good clients who are in the similar
line of business.
 In case of takeover of accounts, account statements with the existing bank/s should be
examined.
k. Circular No. BCC:BR:106:435 dated November 12, 2014 regarding “Preventive Vigilance -
Modus Operandi of recent frauds- Precautions and safeguards to be followed” has been
issued detailing the main points of omissions and commissions in the Systems and
Procedures occurred in frauds/ attempted frauds with a view to create awareness amongst
the staff members like MCA 21, ECGC Defaulter List, PAN/TAN etc.
l. Scrutiny of Financial Statements: In case of financial statements of company

verification of the financial statements and other important documents from ROC on website
of MCA21 is to be done.
m. Other sources: The other sources from where the information about the borrowers could
be obtained are, sometimes it is also termed as surrogates:
 Newspaper reports.
 Public notices in newspapers etc.
 Google Search
 Social Media
For Retail and MSME Loans, our Bank has recently entered into MOU with 4 CPV Agencies to
conduct Contact Point Verification (CPV) on behalf of the Bank.
 Compliance of Know Your Customer (KYC) norms

Reserve Bank of India has issued instructions from time to time relating to proper identification of
account holders and the need for compliance of extant system and procedures to help in preventing
frauds. It has been advised to branches to comply with ‘Know Your Customer’ i.e. KYC norms so as
to prevent occurrence of frauds. Branches should adhere to KYC norms not only in deposit accounts
but in all types of accounts including advances whether fund based or non fund based finance
under the schemes of Agriculture, Retail Trade, or Commercial/ Institutional Sector, Small Scale
Industries etc.
The branches are required to ensure obtaining satisfactory and stipulated identify proof of address
and photo identity of all the borrowers. In case of constitution of the borrowers like partnership
firms, companies etc., such KYC documents of all the partners and directors as well as of the said
firm or company need to be obtained. Such identify proof submitted should be signed by the said
individual and should be verified with the original thereof and the Branch official should also certify
of the same.KYC Documents should also be verified from online tools.
Verification of statutory returns: When the borrower submits various statutory returns like I.T.
Return, audited financials etc., the branch should verify their authenticity either directly or through
approved agencies for such verification, through MCA portal. The branches should ensure to verify
the conduct of the borrower through CIBIL, Willful defaulters list, caution advices etc. and satisfy
themselves thereupon.
2. TECHNICAL APPRAISAL
The technical appraisal of a credit proposal involves a detailed study of the following aspects:
 Availability of basic infrastructure
 Licensing/registration requirements
 Selection of technology
 Availability of suitable technical process, raw material skilled labour etc
3. MANAGEMENT APPRAISAL
In case of projects, units or enterprises run by individuals as sole proprietors or partnership firms, it
is usually one or two persons who manage the entire project, unit or the enterprise whether it be of
manufacturing or trading. In such cases a careful appraisal of the individual borrowers who run the
show as enumerated in Para 1- (Borrower Appraisal) to decide whether to finance such a project,
firm or enterprise or not.
However, in case of corporate borrowers and also in case of large borrower accounts, it is usually a
set of professionals who manage the entity each specialized in a specific area of management i.e.
production, finance, marketing, personnel etc. Unless there is a complete integration of all these

functions within an organization, it cannot function effectively. Management relation with
employees is also very important.
4. FINANCIAL APPRAISAL:
The term financial appraisal refers to the study and ascertainment of the following aspects of the
project/unit:
 Determination of the cost of the project.
 Assessment of the source of funds/means of financing the project.
 Profitability estimates.
 Break even analysis.
 Cash flow projections.
 Projected balance-sheet.
 Ratio Analysis
5. ECONOMIC APPRAISAL:
The performance of a project is influenced by a variety of other economic, social and cultural
factors. Even if a project is technically feasible and financially viable, it may not satisfy the
economic needs viz. employment potential, development of industrially backward areas,
environmental pollution etc.
Further as capital is a scarce resource, it is necessary that it must be allocated in such a way that it
yields best possible return to the society in general and the investor in particular. As such a
detailed appraisal of the project in terms of the return it generates to the investor and the lending
institutions is necessary before a decision is taken to commit resources.
Method of economic appraisal includes sensitivity analysis and computation of the Internal Rate of
Return of the project.
6. MARKET APPRAISAL:
While appraising a proposal it is not only necessary to find out whether it is technically feasible and
financially viable, but also important to ascertain the marketability of the product
manufactured/sold. If goods produced cannot be sold there would be no point in producing them.
Hence the marketability or salability of goods is of great importance.
Existence of a market for the product provides the rationale for its production. If the product sought
to be manufactured is the only one of its kind for which there are no substitutes, the marketing of
the same may not be a problem excepting when it can be freely imported and that too at a lesser
cost. However, if there are many competitors, the entrepreneur may find the going tough. However
a combination of the factors like man behind the show, the quality of the product and the strategy
for its sale will result in its successful marketing.
Therefore, a careful survey of the market to determine the following aspects is called the Market
Appraisal:
a. General Market Prospects for the Product
b. Position of the product vis-à-vis the competitors
c. Size of the market and share of the proposed unit
d. Price structure
e. Raw Material
f. Marketing Strategy

7. ENVIRONMENT APPRAISAL
Environmental appraisal concerns with the impact of environment on the project and vice versa.
The factors which may affect a project include the water, air, land, sound, geographical location
etc. Borrower should have obtained all necessary clearances from pollution control board of the
state, permission and licenses to run the business.
DUE DILIGENCE/ PRECAUTIONS TO BE TAKEN FOR SANCTIONING OF TAKEOVER

PROPOSAL (As per BCC: BR: 103: 159 dtd. 09th June, 2011)
Various discrepancies and lapses observed relating to takeover of borrower accounts from other
banks are given hereunder.
1) Branches are not obtaining confidential opinion of the Account of the Borrower from previous
Banks.
2) The letter for obtaining confidential opinion is not confidentially sent.
3) Letter is prepared and handed over to the borrower instead of sending by post.
4) Report is accepted from the hands of the borrower instead of delivery by Post. After obtaining
the confidential opinion from his previous bank, the Borrower is Fabricating the confidential
opinion required by the Bank and submits the same.
5) The report is not obtained in IBA format.
6) Reports are not scrutinized properly and ambiguous reports are accepted.
7) Last 6 months statement of account not obtained and kept on record and if obtained not
scrutinized.
8) Accounts sometimes are over drawn or out of order, before the takeover of the account.
9) Cheque return charges which indicate health of the A/c is over looked.
10) The branch officials/Credit in-charge are not exercising due diligence in obtaining various
information about the borrower through their existing bankers and other market sources.
11) Information about borrower may be obtained from various other market sources, which is not
done, i.e.; ECGC, Manufacturer’s association etc
12) CIBIL Report is not verified and is not kept on record making part of the appraisal.
13) Pre-sanction inspection of Office / Factory of the borrower, and the property to be mortgaged is
not carried out as per the bank’s norms.
14) Different officers are not involved in carrying out this job to confirm the validity of the
information submitted.
15) Intermediary persons like CA, Financial Agents, person introducing the account to the branch
etc. are accompanying inspecting/Credit Officer during inspection.
16) In inspection report, the mention of establishment of ownership/ correctness of the property, /
address is not mentioned.( fill in the blanks type report)
17) Inspection Reports are not prepared immediately after the inspection. Dates of pre sanction
inspection are mentioned after the date of sanction.
18) Credit appraisal and assessment of credit limit is not properly done in the proposal.
19) Sales for the last two years – (actual) – performance of current year and future
Projections are mentioned in assessing the limit. Current performance is not verified with
turnover in the account, past performance is not verified with sales tax and other returns and
projections are not justified while assessing the limits.
20) The Chartered Accountant’s status is accepted without verification of the same. (The signals
that the Balance Sheet figures are not matching with actual business are over looked).
21) Balance Sheets are accepted blindly, without Chartered Accountant’s certificate, signature.
22) Proposal copies are handed over to CAs for preparation of credit appraisal.
23) Proposals are prepared as “Filling the Blanks” style. Justification for limits sanctioned, is missing
which is the main reason for taking over of the accounts.
24) Title clearance report is not obtained from Panel Advocate. It is also not scrutinized properly.
Certificate showing search for 30 years is not clearly mentioned in the Advocate’s report. Report
with riders is accepted.
25) Documents are verified from the same Advocate from whom title clearance report is obtained.
26) Borrower is directed to approach the Advocates for obtaining the Title Clearance Report.
Advocates are handing over reports to borrowers which are accepted by the Branch.
27) There are chances that the reports may get fabricated by the borrower.
28) Branch should get the report directly from the Advocate along with the bill for the charges.
Customer should not be the part of this process.
29) Valuation reports are accepted from the borrower, which is the responsibility of the Branch to
arrange for the valuation by approved valuer. No customer should be directed to valuer for
valuation purpose. It is the Branch’s responsibility.
30) Valuation bill should be paid by the Branch at the debit of the customer’s account.
31) The valuation report must be delivered to the Branch and not to the borrower.
32) Valuation report is to be scrutinized by the Branch and need not be accepted as submitted. Price
of the land can be judged with the ongoing price in the area and also the distress sale value
mentioned in the report.
33) Any inflated price, to accommodate the required limit of the customer should be pointed out
and proper / justified value should be accepted.
34) Loan application and Form No 135 is not scrutinized. Declaration in Form No 135 for borrower
and guarantor both is not accompanied by required documents as per declaration as a proof of
declaration. Income Tax Return (ITR) land revenue receipts / payments, 7/12 extracts are not
kept on record.
35) KYC compliance is not proper. Fabricated documents are accepted and cross verification is
neglected. PAN Card can be verified from www. incometaxindia.gov.in by uploading name of the
customer. Outdated documents are accepted. Certification that duplicates are verified from
originals is missing. KYC Documents should be verified from online tools.
36) During inspection KYC documents are not cross verified. It is easy to cross verify address
document or address proof.
37) Inspection of collateral offered is not carried out.
38) While taking over the account, the list of securities available with old Bank is not kept on record
or verified.
39) Documents are not collected personally by the Credit Officer from the Bank from whom
accounts are taken over.
40) Charges are not registered with ROC in prescribed time limits.
41) Normally, take over account cases are for sanction of take over with increased limits and proper
assessment with justification of increase in limit should be a part of appraisal.
Besides above financial and non financials guidelines for takeover of loan from other Banks are
given in Domestic loan Policy which should be complied with. The takeover norms be strictly
followed in order to maintain quality of accounts that are coming into our fold from various other
banks and also to avoid unnecessary disciplinary actions on the officers and executives who are
involved in the functioning of Credit.
%%%%%%%%%%

Test your Understanding:
1. Pre-Sanction Appraisal or Credit Appraisal includes following

a) Borrower Appraisal
b) Technical Appraisal
c) Management Appraisal
d) Financial Appraisal
e) All of the above
2. Technical Appraisal includes following

a) Selection of technology
b) Licensing/registration requirements
c) Availability of basic infrastructure
d) Availability of suitable technical process, raw material skilled labour etc
e) All of the above
3. Market Appraisal include following:

a) Marketing Strategy
b) General Market Prospects for the Product
c) Size of the market and share of the proposed unit
d) Position of the product vis-à-vis the competitors
e) All of the above
4. Economic Appraisal include following

a) Profitability estimates
b) Break even analysis
c) Sensitivity analysis
d) Projected balance-sheet
e) None of the above
5. Financial Appraisal include following

a) Profitability estimates
b) Break even analysis
c) Cash flow projections
d) Projected balance-sheet
e) All of the above
6. Which one is the discrepancy/ lapses observed relating to takeover of borrower accounts.
a) Proposal copies are handed over to CAs for preparation of credit appraisal
b) CIBIL Report is verified
c) Last 6 months statement of account is obtained and scrutinized
d) Confidential opinion of the Account of the Borrower from previous Banks is obtained
e) All of the above
7. Calculating IRR (internal rate of return) is part of .

a) Financial Appraisal
b) Management Appraisal
c) Technical Appraisal
d) Economical Appraisal
e) Environmental Appraisal

8. Section 180 is applicable on?
a) Pvt Limited company
b) Public Ltd company
c) Small company
d) One person company
e) All of the above
9. 5 Cs in Borrower Appraisal are ?

a) Character
b) Capacity
c) Capital
d) Collateral
e) Condition
f) All of the above
10. Which is the authenticated source of verification of documents submitted for credit appraisal?
a) MCA website – for Ltd Company
b) Income tax website – For PAN card
c) ICAI website – For verification of CA/ Auditor
d) RBI website – SMA 2 verification
e) All of the above
Answers:
1 2 3 4 5 6 7 8 9 10
E E E C E A D B F E

State true or false
Sr No True or False
1 5 'C's i.e. character, capacity, capital, collateral and conditions are
part of 1. Borrower Appraisal
2 Succession planning is related to satisfaction regarding the fact that
unit has in its fold adequately groomed/trained, second line of key
persons to run its business
3 Environmental appraisal concerns with the impact of environment on
the project and vise versa.
4 Where total borrowing of company exceeds powers of the Board, the
Board has to seek approval of its shareholder U/S 180.This is
applicable to public limited company and a private limited company
which is a subsidiary of public limited company
5 Bank can give any amount of loan to any borrower or group concerns.
6 Documents can be verified from the same Advocate from whom title
clearance report is obtained
7 The letter for obtaining confidential opinion can be sent with borrower
representative
8 VAT/Sales Tax Returns / Income Tax Returns / TDS Return and
verified with the original challans for depositing the tax should be
obtained
9 Inspection of collateral security is not compulsory
10 Borrower is not require to obtain all necessary clearances from
pollution control board of the state, permission and licenses to run the
business
1 2 3 4 5 6 7 8 9 10
True True True True False False False True False False

4. ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
Quick Bites:
This chapter explains the rationale behind the Analysis & Interpretation of Financial
Statements, the concept of Balance Sheet, the concept of Profit & Loss Account, the
importance of Cash Flow & Fund Flow statements.
1. INTRODUCTION:
Banks require assessing financial strength and the performance of the borrowers for proposal &
appraisal. The main source of information for assessing the viability and financial strength of
operations of the borrower, are financial statements which consist of –
1. Balance Sheet
2. Profit & loss Account and
3. Cash flow (it gives total cash flow of the firm / Company)
4. Auditors’ report
5. Directors’ report
 Directors Report - This include the Financial results, Operations, Dividends, Achievements,
Any major events of that year, management discussion & analysis, subsidiaries & groups,
Director’s Responsibility Statement, Corporate Governance, Vision for the coming year, etc.
 Auditors Report on Financial Statement - The report include premises of their audit, the
standard they have adopted for audit, the records they have been provided to peruse,
whether the company/ firm has paid the tax as per guideline, whether the company/ firm has
observed the laid down guideline for them, etc.
Both Director’s Report & Auditor’s Report are part of financial statement & should be important
indicator of the business performance of the firm / Company. The system or approach for analyzing
Financial Statements depends upon the purpose for which the study is undertaken. Our purpose of
analyzing the financial statements is maintain due diligence (financial part) and to make assessment
of credit needs as well as to understand financial health of the concerned firm/company.
 Credit Appraisal:
While analyzing a credit proposal, several factors, apart from analysis of statements, are taken into
account like Financial Statement, Operational data, Study of personal credit-worthiness of the
borrower/ guarantor, Dealings with other banks, Technical feasibility, production process,
particulars of plant & machinery, infrastructure facilities, technical report, Financial viability, cost of
the project, sources of finance, relationship between cost of project & source of finance, Economic
viability, repayment capacity, return on capital employed, return on equity capital/net worth,
Marketing prospects, Management, Personal Competence of the Promoters, Financial
Resourcefulness. The process of credit analysis can broadly be divided into the following major
heads:
 Promoters and their business background
 Nature of the industry/business and industry trend.
 Factors of production i.e. Land, Building, Machinery, Labor,Entrepreneur etc.
 Past financial record, present position and future profitability
 Financial Planning
 Borrower's integrity
 Purpose of advance
 Repayment programme
 Security and other terms and conditions
 Associate concerns, if any, and their performance
 Promoters'/Borrowers' dealings with our Bank and other banks, if applicable
This handout describes meaning of Financial Statement and their analysis / interpretation from
banker’s point of view.
2. FINANCIAL STATEMENTS:
(i) Whether the business organization is a sole proprietary concern, partnership or a Joint Hindu
Family firm or a company registered under the Companies Act, it has to maintain a record of all
its assets and liabilities. They should also maintain proper records of all transactions,
receipts and payments. All these transactions are written up and the accounts are finalized
as at the end of a twelve month period which will be the concern's accounting year. The
accounting year of a concern need not necessarily synchronize with the calendar year. The
period of the accounting year can be reduced or increased with the permission of the
appropriate authority. On finalizing the accounts, a statement of profit & loss account and
balance sheet will be drawn up.
(ii) Balance sheet and profit & loss account are different in character. Profit & loss account shows
the result of operations of the concern for a given period, whereas balance sheet provides
the snap shot view of firm’s assets and liabilities on a particular day. The position of assets
and liabilities of a concern is influenced by its operations during the given period.
2.1 PROFIT AND LOSS ACCOUNT:
(i) It shows the income and expenditure of a concern for the relevant accounting year. It is
usually divided into three sections viz. manufacturing/trading Account, general profit and
loss account and an appropriation account.
(ii) The manufacturing/trading account will show manufacturing/trading income on right side
and expenses as well the resultant gross profit on the left side. The general profit and loss
account will open from the gross profit/loss and end with the net profit/loss. The
appropriation account will show the appropriation of net profit under various heads.
(iii) The profit and loss account is an important statement, as it shows the income and
expenditure of a concern during the year. The real protection to the lender is the ability of
the concern to perform well and make a reasonable profit and this information will be
available only in the profit and loss account. A weak balance sheet may not necessarily
represent a bad credit risk if profitability is good and is improving from year to year.
Conversely, a concern with a sound balance sheet may not be a good fir credit, if it is
incurring losses consistently.
 Study of Profit and Loss Account:
(i) It should be seen that amounts of expenditure shown in profit and loss account are not
exorbitant or unduly high in relation to the nature of the activity. It may so happen that
there is a spurt in office expenditure in a particular year, which drains away the profit of
the concern, which may in fact be due to diversion of funds. If the interest paid appears
to be rather high in relation to the interest charged by the Bank, reasons therefore
should be ascertained, particularly when there are covenants and non-interest/low
interest bearing deposits should be brought in and/or the concern should not resort to
outside borrowings.
(ii) A careful scrutiny of profit and loss account will also reveal, whether all the usual expenses
are accounted for or not. Otherwise enquiries should be made with the borrower.
Adjustments at the yearend play a vital role in determining the net profit. Usual
adjustments are as under:
(a) Basis of valuation of inventory should be consistent and as per accepted mode. The
usual practice is to value the raw material at average cost, others at actual prices
and finished goods at cost or market value, whichever is lower.
(b) Rate and mode of depreciation should be consistent and full amount should be
provided for.
(c) Adequate provision for accrued liabilities and outstanding expenses should be made.
(d) Provision for Bad and Doubtful Accounts should be adequate.
(e) Efficiency of operations should also be assessed by study of various ratios. Different
groups of expenses like (i) Production expenses (ii) Selling and distribution
expenses (iii) Administrative expenses etc. should also be studied.
2.2 STUDY OF BALANCE SHEET:

It is a statement of assets and liabilities of a firm on a given date. In nutshell, it shows what the
concern owes (liabilities) to others and what others owe to it (assets) which should be equal. It
also indicates the sources of funds and the utilization thereof. Liabilities provide sources of funds
which are utilized for acquiring assets. If a concern suffers a loss, it is also treated as "use of
funds". Hence loss is shown on assets side.
All limited companies are required to publish their financial statements only in the prescribed
formats laid down in the Companies Act, 2013
The mode of classification of assets and liabilities for our analysis of the balance sheet may
be different from the mode of classification as per the Companies Act, e.g. term loan
installments falling due within one year from the date of the balance sheet, are to be shown as
current liabilities even though the entire term loan was shown as term liability in the printed
balance sheet. (After Notification No. S.O. 447(E), dated 28th February 2011 schedule VI has been
revised)
 Preview of Balance Sheet:
Liabilities Assets
Capital Fixed Assets
Long Term Liabilities (Land & Building, P & M etc )
(Term Loan, Unsecured Loans) Noncurrent Assets
Non-Current Liabilities (FDR kept as margin in Bank)
(Loans & advances ) Intangible Assets
Current Liabilities Current Assets
(Sundry Creditors , Banks CC Limit etc.) (Sundry Debtors, Cash & Bank Balance etc.)
A ==== B

 ASSETS:
Assets will have to be classified into four groups viz. fixed assets, current assets, non-
current/miscellaneous assets and intangible/fictitious assets.
Fixed Assets:
 Fixed assets will have the same meaning, as what is given in the balance sheet. They include
land & building, plant & machinery, equipment, installations, fixtures & fittings, vehicles,
furniture, leasehold rights, land development and also capital works in progress. The finance for
acquisition of fixed assets should normally be from long term sources like own funds, i.e.
capital, retained profits etc., term loan, debentures etc. While analyzing the balance sheet, it
should be verified whether there is any increase in the gross block and if so, the source of
finance availed for acquiring them. In no case, working capital should be diverted for
financing fixed assets.
 Staff handling the Proposal should examine whether revaluation of assets is done. Change in
method of depreciation is affects the profitability and financial indicators of an entity.
All the above factors would distort this head and hence the effect thereof, should be highlighted
while analyzing the balance sheet to arrive at otherwise true picture.
Current Assets:
This term means the assets which enter the process of production/sales and the cycle is complete
by their ultimate recovery in cash. Classification of assets into current assets should be strictly as
per Bank's/RBI's guidelines and it is to be ensured that the other assets are not included under this
head, while assessing working capital requirements or analyzing the balance sheet.
They include cash, bank balances, inventories, receivables, amounts due from proprietor, partners,
associate concerns or others on current account (not in the nature of long term advances),
advances to suppliers of raw materials, stores, spares and consumables, advance payment of tax,
other trade advances, prepaid expenses and the like.
Current assets do not include doubtful debts, deferred receivables maturing after one year,
investments other than in Government Promissory Notes, deposits of a permanent nature with
statutory bodies, advances to suppliers of capital equipment or for acquisition of a capital asset and
the like.
The composition of current assets requires to be closely examined from the angle of their
chargeability as security for Bank's advances, besides ensuring that there is a healthy mix of
different components of currents assets.
It is pertinent to mention here that the revised Schedule VI to the Companies Act which is effective
from 1.4.2011 has broadened the scope of current assets and also linked it to the operating cycle of
the company. The definition as per revised Schedule VI is as under:
An asset shall be classified as current when it satisfies any of the following criteria:
 it is expected to be realized in, or is intended for sale or consumption in, the entity’s
 it is held primarily for the purpose of being traded;
 it is expected to be realized within twelve months after the reporting date; or
 it is cash or cash equivalent unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the reporting date.
Operating cycle is the time between the acquisition of assets for processing and their realization in
cash or cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to
have a duration of 12 months.

Hence it is very clear that if the operating cycle of a company is longer than 12 months
then the assets which are meant for consumption or sale during that period will also be
current assets.
Miscellaneous / Non-Current Assets:

All tangible assets other than fixed and current assets are to be classified under this head. In
addition, it will include unequated investments of any kind such as lien marked FDR or FDR kept
as margin for Bank guarantee facility.
Intangible and Fictitious Assets :
Intangible assets are those which carry some value to the concern (but are not tangible) like
goodwill, patents, copyrights, trade mark etc. Although in strict commercial terms, these items
are valuable, for analytical purposes, branches should not attach any value to these items.
Fictitious assets include deferred revenue expenditure, share issue expenses, pre-operative
expenses etc. which are to be written off in due course and the debit balance in Profit and
Loss Account. Branches should ignore the value of both intangible and fictitious items
and they should be subtracted from the net worth of the concern.
 LIABILITIES:
Liabilities, which are the sources of funds, should be grouped under two categories viz., long
term liabilities and current liabilities.
Long Term Liabilities:
1. Long term liabilities will have two components viz. own funds or net worth and external
liabilities (long term debts).
2. Net worth (own funds) includes paid-up capital and reserves of all kinds after providing for
doubtful/bad debts in advances, fictitious and intangible assets. (In case paid-up
capital includes redeemable preference shares maturing within 10 years, they should be
treated as 'Term Liability'. Any part of these preference shares is redeemable within the
next 12 months, the amount thereof should be considered as "Current Liability.")
3. Long term debt is a debt which is payable one year after the date of balance sheet
and it includes the following :
a) Debentures and public deposits, excluding the amount maturing for repayment within
next 12 months.
b) Redeemable preference shares maturing within 10 years and not within next 12 months.
c) All term borrowings, both secured and unsecured, from banks and financial institutions,
excluding installments falling due within the next 12 months. All deferred payment
liabilities, excluding installments/accepted bills maturing during the next 12 months.
Private borrowings payable after one year. Any other liability payable after one year.

Current Liabilities:
All liabilities, other than term liabilities, are to be classified as current liabilities and branches should
ensure that these liabilities are due for payment within the next 12 months, which includes
following:
1. Sundry Creditors, including Bills Payable.
2. Short term borrowings, including outstanding bills discounted / purchased with banks
(both secured and unsecured).
4. Interest and other charges accrued and outstanding/not due for payment.
5. Advance payments received from customers.
6. Deposits from dealers etc.
7. Public deposits and/or debentures payable during the current year.
8. All installments due under term loans, deferred payment liabilities, redeemable preference
shares etc. within the next 12 months.
9. Statutory liabilities like PF dues, ESI dues, sales tax, excise duty etc.
10. Provisions for payment of dividend, bonus, liabilities for expenses, gratuity and any
other dues falling due within the next 12 months.
The scope of current liabilities has been widened by the revised Schedule VI which
defines current liabilities as under:
A liability shall be classified as current when it satisfies any of the following criteria:
• it is expected to be settled in the entity’s normal operating cycle;
• it is held primarily for the purpose of being traded;
• it is due to be settled within twelve months after the reporting date; or
• the entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting date. Terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
Therefore the current portion of all the term liabilities is to be shown under this head by virtue
of this definition.
Contingent Liabilities:
 These items are indicated by way of a foot-note in the balance sheet as they are not
prima facie crystallized liabilities affecting the overall liability position. Hence, very
often sufficient attention is not paid to study them carefully. However, a closer look
at these items may, many a times, reveal that they often include liabilities/commitments
with serious financial implications, which may have adverse impact later on. For
example, claims not acknowledged as debts, payment for capital contracts not
provided for etc.
 Similarly, issues of far-reaching implications like change in the accounting practices and
procedures, as also special accounting treatment given to certain transactions are quite
often included under this heading. Each and every special comment should be carefully
and critically analysed to understand its implications for the amounts included in the
balance sheet e.g. liabilities under lease agreement etc. Particular care should be taken to
fully satisfy that the company has made satisfactory arrangements for meeting commitment.

1.3 FUNDS FLOW AND CASH FLOW STATEMENTS
 FUNDS FLOW STATEMENT:
Funds do not mean only cash. Funds flow means inflow and outflow of funds. Inflow of funds takes
place from different sources and outflow through various uses. Funds flow analysis is an evaluation
of sources and use of funds. It is a statement showing the different "sources" and "uses" of funds.
Liabilities are the source of funds and assets are the application of fund. Inflow and outflow of the
fund can be noticed by increase or decrease in assets and liabilities. The movement of the fund
would be as under:
Balance Sheet Increase Decrease

Items
Liabilities Source of Funds Uses of Funds
Assets Uses of Funds Sources of Funds
If we see two consecutive years’ balance sheet, we noticed that certain items of assets and
liabilities have been changed. The changes in assets and liabilities as compared to previous year
outstanding balance, represents the fund flow or financial position of the firm/ company.
(A) Sources Of Fund (Inflow of the funds):

Broadly the sources of fund are divided into two parts namely,
Sources of funds
Long Term Funds Short Term Funds
(1) Long term sources of fund are by way of issue of capital, borrowed capital and other long
term sources which are payable over more than one year. Like, capital, debentures, public
deposit, term loans etc.
(2) Short term fund includes current liabilities and provisions which shall be liquidated within a
short period not more than one year. Like, sundry creditors, working capital finance from
bank/s, provisions for unpaid expenditures etc.
(B)Application Of Fund (Outflow of the fund):

Application of funds are also divided into two parts namely,
Application of funds
Long Term Application Short Term Applications

(1) Long term application (uses) of funds invested in acquiring fixed assets and investment as
well as repayment of capital etc.
(2) Short term application of funds includes funds invested in acquiring current assets require
for day to day working capital needs.
Utility of fund flow statement:
The fund flow statement helps to know

(1) Where have the profit gone?
(2) Why there is imbalance exists between liquidity position & profitability?
(3) Why the firm is financially sound in spite of losses?
Steps for construction of fund flow statement:
Take the figures of Net Profit before tax from the profit and loss account as base to draw fund flow
statement. But to have clear idea about the fund generated out of trading activity/ manufacturing
activity etc. there are certain debit items on profit and loss account which are to be added back.
These items are as under:
A-Depreciation: It is a part of retained profit. The depreciation is provided by debiting the profit and
loss account. However, it is non fund item which is to be added back to the profit. This will give
figures of Gross fund generated from the main business activity.
B-Profit or Loss on account of sale of Assets : These are not the transactions relating to business
operations. Any profit out of such transactions must have resulted in to augmenting the figures of
profit. Hence, the same amount to be deducted from the gross fund generated. Conversely, any
loss due to such transactions is to be added back to profit.
C-Provision for taxation: Any provision for the current year should be added back to profit. However,
any provision for tax during the previous year should be assumed to have been paid during the
current year. Hence, no change is to be considered for fund flow statement.
D-Dividend: Any provision for proposed dividend is to be added back to profit for fund flow statement.
But, Interim dividend paid during the year will be considered as application of fund during the year
by debiting the profit and loss account. Same way any proposed dividend of previous year should
be treated as paid during the year by debiting provision for dividend. Hence, not to be added /
deducted from profit figures.
E-Preliminary and pre-operative expenses: the amount written off during the year is to be added
back to the profit.
1. Take the figures of previous year outstanding balance of each item of assets and liabilities.
2. Compute the changes in respect of each individual assets and liabilities between two
consecutive years. Please ensure that sum total of changes in the assets is equal to the sum
total of changes in the liabilities.
3. Even if changes in assets and liabilities are in two different directions i.e. Inflow and outflow
both, no netting to be done. Both are to be shown separately as sources and application of fund
e.g. Change in fixed assets due to sale or purchase during the year or change in term loan due
to fresh disbursement and repayment of existing installments are to be shown on two different
side.
4. Work out the total inflow and out flow of the funds during the year. Analyze the total inflow and
outflow into long term and short term resources and applications. Satisfy yourself that long term
surplus over the long term application is adequate to margin or NWC for working capital.

Sources of Funds Change between two
years Balance sheet
Fund from operation ------------------- 100
Issue of Shares
Issue of Debenture
Long Term Loans
Sale of Fixed Assets/Investments------- ------------
Other Trading Receipts
Decrease in Working Capital (if any) 100
Uses of Funds
Loss from operations

Redemption of Preference Shares/Debentures
Repayment of Long Term Loans
Purchase of Long Term assets/Investments 80
Payment of Dividend & Taxes 40
Increase in Working Capital (if any) 20
10
50
 CASH FLOW STATEMENT:
Cash is a part of total fund of the firm/ company. However to know the increase / decrease in
liquid position (Cash and bank Balance) at the end of financial year cash flow statement is
prepared.
Commercial banks in India are following the cash flow method especially in the context of
assessment and monitoring of working capital credit facilities. The computation would be as
per the fund flow statements, by working out changes in assets and liabilities over the previous
year.
1. As per the accounting Standard AS-3 of ICAI, following categories of business enterprises have
to prepare and present the cash flow statement.
a) Companies or enterprises in respect of which equity or debt securities are listed or
proposed to be listed on any Stock Exchange.
b) All other Commercial, industrial and business enterprises whose turnover for the
accounting period exceeds Rs. 50 Crores.
2. Cash flow means cash and bank balance, cash equivalents which includes short term highly liquid
investments that are readily convertible into cash.
3. Cash flow statement is prepared in following groups:

a) Net operating activities cash flow (Operating inflow less Operating outflow).
b) Cash flow from investment activities.
c) Cash flow from financing activities.
d) Net increase in cash or cash equivalent
Restructuring of Balance Sheet is to be done as per CMA Requirement. The Balance sheet prepared
as per the Companies Act needs to be restructured by the Bank for meaningful analysis.

Cash Flow
Cash Flow from Cash Flow from Cash flow from

Operations financing activities Investing activities
Cash Flow at a glance:
A- If cash flow from operation positive then it is good because that is main sources for all funds
generated with the help of operations i.e. PROFIT
B- If cash flow from financing is positive then it will increase the burden of payment in coming
years that means sufficient cash flow in future should be there to repay this burden. If its
negative that shows firm has been paying its long term liabilities.
C- If cash flow from investment is positive that means firm has sold its assets and cash have
been generated .However if its negative then it shows deployment of funds in assets. Now
the Banker has to question if these assets will be generating income or not in future years.
Here we have to check diversion of short term funds into purchase of long term assets.
2.4 TERMS RELATING TO FINANCIAL ANALYSIS
1. Authorized capital: The level up to which company is legally permitted to issue the shares.
2. Issued capital: The capital for which the prospectus is issued and subscription is invited.
3. Subscribed capital: The amount and number of the shares for which the subscription is
received by the company for the issue.
4. Paid up capital: The amount and number of shares allotted to the share holders by the
company against the subscribed capital.
5. Capital Reserve: The reserve which is not freely distributable to the share holder. It is
generally created out of capital operations such as share premium account.
6. General Reserve: This is also called revenue reserve which is created out of profit and
available for general purpose say for distribution to share holders.
7. Revaluation Reserve: Reserve created out of revaluation of the fixed assets. This is not a
inflow of the fund but mere book entry resulting into increase in size of the balance sheet. It
should be given a netting effect with the fixed assets for reconstruction purpose.
8. Net worth: It is a sum of total, capital and reserve. This is called owners capital.
9. Tangible net worth: Net worth less any intangible assets and accumulated loss.
10. Current liabilities: The liabilities which are to be paid within short duration say within 12
months from the date of the balance sheet are to be classified/ called as Current liabilities.
This is also called temporary loans. The current portion of the term liabilities shall also be
part of the current liabilities by virtue of revised Schedule VI.
11. Contingent liabilities: The liability which are not crystalised as on the date of balance sheet
but may or may not arise is depending upon the happening of certain circumstances. This is
shown as foot note/auditor’s report.
12. Net Block of Fixed Assets: The net value of the fixed assets after deducting the amount of
depreciation. This means Gross block of Fixed assets less block of depreciation.
13. Current Assets: The assets which are changing their forms within short duration, normally
within 12 months, easily converted into cash are called current assets. This is also called

gross working capital.
14. Non Current Assets: The assets which are neither a current assets nor a fixed assets or
fictitious assets are called non-current assets. This is also called non business assets. This
may include, advances to directors, loans to associate concerns, etc.
15. Net working capital: It is excess of current assets over the total current liabilities. It is called
borrower’s own contribution in working capital. It is always from the long term sources.
16. Net sales: Means sales minus sales return minus excise duty if any payable.
17. Gross profit: It is a difference of net sales and cost of sales.
18. Operating profit: This is called profit from main business activity. Gross profit less operating
expenses (financial charges, selling general administration expenses.)
19. Cash profit: Net profit plus depreciation. If unit has reported net loss which is less than
amount of depreciation it would be cash profit but if net loss is higher than the amount of
depreciation then it would be cash loss.
2.5. A BRIEF INTRODUCTION TO IND AS
India has adopted Indian Accounting Standards (Ind AS) that are based on and substantially
converged with International Financial Reporting Standards (IFRS) as issued by the International
Accounting Standards Board (IASB).
An appendix to each Ind AS explains ‘the major differences, if any, between’ the Indian Accounting
Standard (Ind AS) and the corresponding IFRS Standard.
Adoption of Ind AS:
Financial Year Applicable to

2015-16 Voluntary adoption
2016-17 Companies whose net worth is >= INR 500 crore.
Holding, subsidiaries, joint venture or associates of above companies.
2017 -18 Unlisted companies whose net worth is >= INR 250 crores and
all listed (debt or equity is listed) companies
Holding, subsidiaries, joint venture or associates of above companies.
2018 – 19 When a company’s net worth crosses INR 250 crore
commercial banks and non-bank finance companies
2020-21 Insurance companies
Net worth will be determined based on the standalone accounts of the company as on 31 March
2014 or the first audited period ending after that date.
Net worth defined as paid-up share capital + reserves less deferred expenditure and
miscellaneous expenditure not written off, as per the audited balance sheet, but does not include
reserves created out of revaluation of assets, write-back of depreciation and amalgamation.
Significant Areas of difference with previous GAAP:
Financial Instruments Consolidation Employee Benefits

Revenue Recognitions Fixed Assets Intangible Assets

5. Ratio Analysis
Quick Bites:
Ratio is an efficiency index, which reflects performance excellence of an entity. This
handout deals with important financial ratios required for proposal / appraisal,
enabling the reader to evaluate liquidity, solvency & efficiency of the borrower; through
various Ratios.
RATIO ANALYSIS:
 Ratio Analysis means the process of computing, determining and presenting the relationship of
related items and groups of items of the financial statements.
 Ratio analysis is a meaningful comparison between items of financial statements.
 A ratio can be expressed as a percentage (Profit of 20%) or as pure number/times (ex: sale is
3 times of net profit) or as a proportion (like 2:1).
 Whenever we recast the profit & loss and balance sheet, the recast figures should be taken into
account for analysis.
 Various ratios can be obtained from a balance sheet and Profit and Loss Account by such
comparisons. However, we as a banker focus on key ratios falling under three main groups viz.
Liquidity, Solvency and Efficiency through which we arrive at the following characteristics:–
- Liquidity position
- Profitability
- Solvency
- Financial Stability
- Quality of the management
- Safety/Security of the loans to be provided/already been provided
Ratio Analysis
Profitability Leverage Liquidity Efficiency

Ratios Ratios Ratios Ratios

Important ratios to be incorporated in proposal / appraisal are given below:
1. Current Ratio: (liquidity indicator)
It is also called the Liquidity Ratio and a test for short-term solvency. Current ratio is arrived at by
dividing, as on a date, total value of current assets by current liabilities.
Current Ratio = Current Assets/ Current Liabilities.
This ratio reflects the current assets cover for the current liabilities quantitatively at any point of
time. It is the barometer of short term liquidity of the company. In other words, the working
capital resources position is reflected in current ratio and hence higher the ratio, better the liquidity.
Slip back or fall in current ratio would generally indicate diversion of short term funds (either for
acquisition of fixed assets or for outside investment) or cash loss.
Hence, any adverse trend in current ratio should be carefully examined. It should be kept in mind
that it does not reflect the quality of non-cash current assets i.e. the frequency of non-cash current
assets turning over to cash. Generally a current ratio of 1.33:1 is considered satisfactory. However,
in our bank its benchmarking is fixed in light of nature of borrower i.e. Large Corporate Banking,
SME regulatory and SME (expanded definition) which is tabulated below for ready reference.
Business Segmentation Bench-mark Parameter Current Ratio

Wholesale Banking 1.33
SME (Mfg. & Services) under Regulatory Micro & Small 1.17
definition
Medium 1.20
SME (expanded definition) 1.33
The reasons for a lower or higher current ratio to the benchmark need to be examined. Ratios
lower than the benchmark, need the deviation approval.
Example 1:- The Balance sheet of ABC Ltd. is as below

Liabilities AmountAssets Amount
Capital 500000
Fixed Assets 350000
Reserves 300000
Stock 105000
Secured Loan 150000
Receivables 575000
Creditors 220000
Investment 120000
Preliminary Expenses 20000
Total 1170000 Total 1170000
Calculate the current ratio from the above balance sheet.
2 Debt-Equity Ratio (solvency indicator)
This ratio indicates relationship between the external term borrowings and the own funds of the
concern. Bank takes total term liabilities as Debt i.e. total liabilities minus net worth and total
current liabilities. Equity means net worth of the concern minus intangible and fictitious assets.
However, the subordinated funds (i.e. long-term unsecured loans from friends and relatives, etc.)
may be considered as quasi-equity, generally for non-corporate borrowers, and included in equity
while arriving at ratio, if the borrower retains the same at the existing level/ projected level during
the currency of Bank Loan. The subordinated debt however should not exceed borrower’s tier I
capital i.e. capital plus free reserves less intangible assets.
Debt-Equity Ratio = Total Term Liabilities (TTL)/Tangible Net Worth (TNW).
A ratio of 3:1 is considered satisfactory. However, higher ratio may be allowed keeping in view the
activity of the borrower, industry, sectoral classification such as SSI units, other priority sector
advances etc.
Apart from DER (TTL/TNW), bank assesses the Debt Equity Ratio as Total Outside Liabilities (TOL)
to Tangible Net Worth (TNW) also. Total Outside Liabilities (TOL) will be calculated as total of all
liabilities of a company/firm on liability side of balance sheet MINUS the net worth. A ratio of 4.5:1
of DER (TOL/TNW) may be considered satisfactory.
In our Bank, following ratio is considered for financial statement analysis:

DER = Total Term Liability = Benchmark for all types of borrowers is 3:1
Tangible Net Worth
TOL/ TNW = Total Outside Liability

Tangible Net Worth
Business Segmentation Bench-mark Parameter : TOL / TNW
Wholesale Banking 4.50:1
SME (Mfg. & Services) under Regulatory Micro & Small 4.50:1
definition
Medium 4.50:1
SME (expanded definition) 4.50:1
Example 2:- Calculate the DE ratio(TTL/TNW & TOL/TNW) from the balance sheet
available in example 1.
3 Fixed Assets Coverage Ratio: (security indicator)

This shows the number of times the value of fixed assets (after providing depreciation)
covers term liabilities.
Fixed Assets Coverage Ratio = Net Fixed Assets/ (Long/Medium Term Debts)
This should be more than 1.
Example 3:- Calculate the FACR of ABC Ltd from the balance sheet available in example.
4 Debtors Turnover Ratio (liquidity indicator)

This ratio is expressed in number of days. This ratio indicates the average period of credit
extended to its customers by the firm. This refers to the borrower / client’s credit policy as a
part of its overall financial management. The larger the amount outstanding there-under, the
more the depletion of funds for the concern.
Debtors Turnover Ratio = Outstanding Debtors x 365

(Number of days) Gross Credit Sales

Lower figure would indicate that the concern is extending less credit and consequently more
resources are available for its operations. However, depending upon the industry trend, the
levels may vary.
Example 4:- Calculate the Debtors turnover ratio from the balance sheet available in
example 1 and profit and loss account of ABC Ltd. as below:
Particulars Amount Particulars Amount
Manufacturing Expenses 560000 Sales 755000
Selling and administrative expenses 151000 Closing Stock
Depreciation 35000 Raw Material 14500
Provisional for tax 9000 Stock in process 12500
Profits 65500 Finished goods 18500
Other Income 20000
Total 820500 Total 820500
5 Creditors Turnover Ratio (liquidity indicator)

This is arrived at as under:
Creditors Turnover Ratio = Outstanding Creditors x 365
(Number of days) Credit Purchases
This ratio indicates credit period available to the firm from its suppliers.Large creditors may not be a
healthy sign. When a concern is facing financial stringency, there is a tendency to postpone
payment to creditors. Such situations should be distinguished from other usual situations. In such
cases creditors outstanding will be much beyond contracted period. Also liberal creditors may cost
the concern either in the form of inflated prices for purchases or by way of payment of interest.
This can be injurious in the interest of the concern. Branches should note that there can be
fraudulent transactions on the part of the firm through debtors and creditors undermining the
overall interests of the firm. In the name of retaining the customers the firm may offer longer credit
to known/interested parties or agree to pay higher rate of interest or higher prices to creditors
under the guise of enjoying larger credit terms. These kind of fraudulent dealings can be observed
only if market trends are analysed and purchases and sales portfolios of the concern are critically
examined. However, depending upon the industry trend, the levels may vary.
Example 5:-Calculate the Creditors turnover ratio of ABC Ltd. from the balance sheet
available in example 1 and profit and loss account of ABC Ltd. in the example 4.
6 Material Management Ratios (liquidity and financial stability)

The basic ratio falling under this head is Inventory Turnover Ratio. Inventory means raw
materials, stores, stocks-in-process and finished goods. All these items put together are related
to cost of sales for the year. Cost of sales is calculated as under:
Cost of Sales = Cost of Production + Opening Stock of FG – Closing Stock of FG
Where FG = finished goods.
The cost of production is arrived at by adding all direct costs, viz. raw materials consumed,
power and fuel, direct labour, consumable stores, repairs and maintenance to machinery and
other manufacturing expenses adding opening stock of stock in process and deducting closing
stock of stock in process. Cost of sales reflects the ability/production efficiency and as such has
an important bearing on the performance of a concern. This ratio is calculated in number of
days' consumption.

Inventory Turnover Ratio = Inventory x 365
(Number of days) Cost of Sales
Here inventory means closing stock of RM, SIP and FG. This shows the total inventory held for
number of days. The lower the ratio, the more efficient is the inventory management.
Raw Material Turnover Ratio = Raw Materials on hand x 365

(Number of days) Raw Materials Consumed during the year
This shows stock of raw materials on hand in number of days. Here also the Endeavour should
be on a lower ratio unless of course, the raw materials are imported items or canalized items, in
which case larger raw materials holding may be permitted.
Finished Goods Turnover Ratio = Finished Goods on hand X 365
(Number of days) Cost of Sales during the year
This shows for how much period finished goods are on hand. Branches should study the reason
for holding the finished goods and especially beware of rejected goods, defective goods and un-
saleable goods being included in the value of finished goods.
All the above ratios give an indication about the material management by the concern.
Example 6:-Calculate the Inventory turnover ratio of ABC Ltd from the balance sheet
available in example 1 and profit and loss account of ABC Ltd in example 4.
Calculate the working capital cycle of M/s ABC Ltd.
7 Debt Service Coverage Ratio (DSCR) (financial stability)

Ability of a concern to service its term liabilities can be accessed from this ratio, which is applied
while appraising all term loans proposals, studying rehabilitation/ reschedulement / restructuring
proposals, etc. DSCR measures whether interest and installments can be paid out of internal
generation of funds. A ratio of 1.75 would indicate that the concern’s internal generation of funds
would be 1.75 times of its commitments towards term loan obligations and interest thereon.
It works out as under: -
DSCR = (PAT + Depreciation + Int. on TL) / (Int. on TL+TL Installments).
The average DSCR (i.e. the sum of numerator divided by the sum of denominator of DSCR formula
as stated above for entire repayment period of the loan) of 1.75 is considered reasonable.
However, in any year it should not be less than 1.25. The sanctioning authority may consider lower
average DSCR depending upon the nature of project / Industry after recording the reasons for the
same.

In case of Real Estate, the existing method for arriving at DSCR is not relevant since the repayment
is made out of sale of assets which is proposed to be financed.
Business Segmentation Bench-mark Parameter : DSCR

Wholesale Banking Average : 1.75 with minimum 1.25
SME (Mfg. & Services) under Regulatory Micro & Small Average : 1.75 with
definition minimum 1.00
Medium Average : 1.75 with
minimum 1.25
SME (expanded definition) Average : 1.75 with minimum 1.25
Example 7:-Calculate the DSCR of ABC Ltd from the balance sheet and profit and loss
account available in example 1 and example 4.
8 Break Even Analysis, NPV and IRR:

The Break-Even Point (BEP) is the point where Total Costs equal Sales. The BEP is the point at
which, cost or expenses and revenue are equal: there is no net loss or gain, and the unit has
"broken even". The ratio is extremely useful in analysis of Term Loan proposals.
BEP is calculated in order to determine at what level of sales the unit will be able to recover the
costs and will be generating profit at the sales level above BEP. The BEP is calculated as per below
mentioned formulae:-
Break Even Point (No. of unit) = fixed cost / contribution per unit
Where contribution (per unit) = selling price (per unit) - variable cost (per unit)
Break Even Point (sales) = {fixed cost/ contribution (per unit)} * sales price (per unit)
Branches should calculate BEP in all credit proposals involving sanction of fresh term
loan of Rs. 20 Crore and above to part fund setting up of new units or expansion of
existing facilities. A lower BEP suggests that unit has adequate margin of safety. Margin of safety
is computed as (1 minus BEP) and it indicates the proportion of sales which is available as cushion
for any increase in variable costs and is considered as profitability zone of the unit. The sanctioning
authority should assess the viability of unit in terms of BEP and justification of accepted BEP should
be recorded in the proposal.
9 Internal Rate Of Return And Net Present Value

(Applicable for term loan of Rs. 20 crore & above)
NPV
Net present value (NPV) is the total present value (PV) of the project cash flows. It is a standard
method for using the time value of money to appraise long-term projects. NPV measures the excess
or shortfall of cash flows, in present value terms, once financing charges are met. Borrower’s
weighted average cost of capital (after tax) can be used to discount back the cash flows of the
project to arrive at the Present Value. Alternatively the discount rate could be the rate, which the
capital needed for the project could return, if invested in an alternative venture. When analyzing
projects, it will be appropriate to use the applicable interest rate as the discount factor.
IRR
The internal rate of return (IRR) is used to measure and compare the profitability of investment
in financing a large project. It is also called the discounted cash flow rate of return (DCFROR) or
simply the rate of return (ROR).
The internal rate of return on an investment or potential investment is the annualized effective
compounded return rate that can be earned on the invested capital. The IRR of an investment is
the interest rate at which the investment has a zero net present value. A project is considered
viable if it is generating an IRR greater than cost of capital. Branches can compare the project IRR
with the weighted average cost of funds proposed to be invested in the project. The projects with
IRR greater than cost of funds, should be considered for funding.
The following sums up the NPVs in various situations.
If... It means... Then...
NPV > 0 the investment the project may be accepted

would add
value to the
firm
NPV < 0 the investment the project should be rejected
would subtract
value from the
firm
NPV = 0 the investment We should be indifferent in the decision whether to accept or reject
would neither the project. This project adds no monetary value. Decision should
gain nor lose be based on other criteria, e.g. strategic positioning or other factors
value for the not explicitly included in the calculation.
firm
Ratios at a glance :
RATIO FORMULA Interpretation and benchmark
Current Ratio Current Assets Ability to meet current liabilities
Current Liabilities Higher the ratio better the liquidity.
Shortfall may indicate diversion of
(1.33 is desirable)
short term fund.
Debt-Equity Ratio TOL/TNW Coverage of outside liabilities to own
fund. Lower the ratio higher the safety.
TTL/TNW
As per loan policy, TTL/TNW max3:1 &
TOL/TNW max 4.5 :1,
FACR Net Block of Fixed Assets Extent to which FAs cover Term
Liabilities. More than 1 is desirable.
(Fixed Assets Term Liability
Coverage Ratio

Debt-Service Coverage PAT + Dep. + Int. on Loan Debt Servicing Ability.
Ratio
Instal. of TL + Int. on Loan To work out repayment capacity.
Minimum must be 1.25 (Except 1.00
in case of Micro & Small SME) in and
Average should be at least 1.75. Total
of numerators to be divided by total of
all denominators to calculate average
DSCR. In case of real estate DSCR is
not relevant since the repayment is
made out of sale of assets which is
proposed to be financed.
Inventory holding Total Closing Stock x 365
period
Cost of Sales
Efficiency of Inventory Management
(No. of days)
Holding Period of Inventory.
Raw material holding Closing RM X365
period (days)
Raw Material Consumed
SIP holding period Closing SIP X365
(days)
Cost of Production
Fin. Goods holding Closing FG X365
period (days)
Cost of Sales
Debtor turnover Ratio Closing Debtors x 365 Credit policy of the unit/ firm.
(No of Days) Average Period of the credit extended
Gross Credit Sales
to customers.
Creditor Closing Creditors x 365 Ability to get goods on credit.
Ability to repay
Turn over Ratio Credit Purchases
(No.of days)
Operating Profit PBDIT –Other income X 100 Operating Profitability
Margin
Net Sales Efficiency of Production and Pricing.
Net profit Profit After tax X 100 Net Profit margin on business.
Margin Overall efficiency of the unit.
Net Sales
Earning left for Dividend.
Return on Capital PBIT-OI X 100 Measures efficiency of capital
Employed employed in the business
CE +TL(<1yr)+ BB-FIOB
Interest Coverage PBDIT X 100 It measures the ability to pay interest-
Ratio due from the operating cash flows of
Interest
the firm.

Break Even analysis BEP in Qty.= BEP of the Unit. High BEP is risky
Fixed Cost
Contribution of Profit to meet Fixed
Contribution per unit
cost of the Unit.
Sales Means net Sales.
Contribution means SP per
unit minus VC per unit
In our bank, BEP to be calculated in all
proposal including TL of Rs. 20 crores
BEP Sales = BEP in units X and above.
SP per unit
Margin of Safety MOS Sales Value - BEP Sales % of variance sustainable by the unit.
Cushion available in case of variance.
Actual Sales
PAT = Profit after Tax, FA = Fixed Assets BEP = Break Even Points MOS = Margin of Safety.
BB=Bank Borrowings, OI = Other Income, CE = TNW + TL>1 yr. FIOB = Funds Invested Outside
Business, SP = Selling Price, VC=Variable Cost, p.u. = per unit.
Example 8:-Calculate the Net profit margin and operating profit margin of ABC Ltd from
the balance sheet and profit and loss account available in example 1 and example 4
above.
 DEVIATION POWERS AGAINST BENCHMARK RATIOS : (BCC:BR:108/172
07.04.2016 OTHER THAN MSME)
Parameter/ Bench Permitteddeviation levelupto Remarks

Ratio Mark ZOC COCC- COCC- CACB MCB
C ED MD&CEO
CurrentRatio
New/RWI/Take Except GoI, State
Over/Infrastruc Govt, Government of
ture/othersinG 1.33 1.17 1.00 0.85 0.75 No cap India undertaking or
eneral guaranteed by GoI,
State Govt, Accounts
under CDR, CAP or
rehabilitation package
or where product /
scheme specific
guidelines provided)#
DebtEquityRatio(TTL/TNW)
New/RWI/ Except GoI, State
Take Over/ Govt, Government of
Infrastructure/ India undertaking or
others in 3.0 3.5 4.0 4.5 5.0 No cap guaranteed by GoI,
General State Govt, Accounts
under CDR, CAP or
rehabilitation package
or where product /
scheme specific
guidelines provided)#
DebtEquityRatio(TOL/TNW)
Except GoI, State
New/RWI/Take
Govt, Government of
Over/Infrastruc
No India undertaking or
ture/others in
4.50 devia 5.0 5.5 6.0 No cap guaranteed by GoI,
General
-tion State Govt, Accounts
including Micro/
under CDR, CAP or
SME/ MSME
Accounts rehabilitation package
or where product /
scheme specific
guidelines provided)
AverageDSCR
New/RWI/Take
Over/Infrastruc
ture/others in  DSCR not to be
General 1.75 1.6 1.50 1.40 1.30 No cap applicable for
including Micro/ 0 NBFC, Real Estate.
SME/MSME
Accounts
MinimumDSCR
New/RWI/
Take Over/  DSCR not to be
Infrastructure/ 1.25 1.25 1.2 1.15 1.10 No cap applicable for
in other 0 NBFC, Real Estate.
General
Accounts
FACR(Applicablefor TermLoans)
New/RWI/
Take Over/
Infrastructure/i 1.0 0.90 0.8 0.70 0.60 No cap
n other 0
General
Accounts
Important Financial BenchMark Ratios for following Specific Industries

(BCC:BR:108/172 07.04.2016)
DE DE DSCR
Industry BenchmarkR Current DSCR
atio Ratio Rati Ratio(TT (Average)
Textile Min/Ma Min o(TO
Max5.00 L/TNW)
3.50 Min 1.00 Min 1.25
Iron&Steel xratios
Min/Ma 0.75
Min L/TN
Max5.50 4.00 Min 1.00 Min 1.25
Cement xratios
Min/Ma 0.75
Min W)
Max5.50 4.00 Min 1.00 Min1.25
Automobile xratios
Min/Ma 0.75
Min Max5.00 3.50 Min 1.00 Min 1.25
Gems&Jewe xratios
Min/Ma 0.75
Min Max4.50 3.50 Min 1.00 Min 1.25
llery
Pharmaceuti xratios
Min/Ma 1.15
Min Max4.50 3.50 Min 1.00 Min 1.25
cals
Power xratios
Min/Ma 0.80
Min Max6.00 4.00 Min 1.00 Min 1.25
Engineering xratios
Min/Ma 0.75
Min Max4.50 3.00 Min 1.00 Min 1.25
WholesaleTr xratios
Min/Ma 0.80
Min Max5.00 3.00 N.A. N.A
ading
NBFC xratios
Min/Ma 1.10
N.A Max7.00 6.00 N.A. N.A
xratios
 NBFCs should maintain minimum Capital Adequacy Ratio of-15%-or as per regulatory
guidelines.
 NBFC (Housing Finance) are eligible to borrow upto 16 times of NoF as per NHB guidelines.
 DSCR to be not applicable for Real Estate Sector.
 TheNetNPARatioofNBFCsshould
Deviation preferablybeupto
Deviations from benchmark orbelow3%.
ratios will be referred to CACB in respect of proposals falling
up to the lending power of CACB. Beyond CACB power, authority for deviation will rest
with MCB.
As per Circular no BCC:BR:110:75 dated 14.02.2018, there has been a realignment of the
discretionary powers for deviation in financial ratios under MSME Regulatory & Non Regulatory
accounts as well. The readers are advised to refer to this latest circular before deciding upon the
deviation powers.

6. Break Even Point – An Overview
 Introduction
Break-even analysis is a technique widely used by production management and management

accountants. The break-even point is the point at which revenue is exactly equal to costs. At this
point, no profit is made and no losses are incurred. The break-even point can be expressed
in terms of unit sales or dollar sales. That is, the break-even units indicate the level of sales that are
required to cover costs. Sales above that number result in profit and sales below that number result
in a loss. The break-even sales indicate the dollars of gross sales required to break-even.
It is important to realize that a company will not necessarily produce a product just because it is
expected to breakeven. Many times, a certain level of profitability or return on investment is
desired.. However, the break-even is an excellent tool to help quantify the level of production
needed for a new business or a new product.
It is based on categorizing production costs between those which are "variable" (costs that
change when the production output changes) and those that are "fixed" (costs not directly related
to the volume of production).
Total variable and fixed costs are compared with sales revenue in order to determine the level of
sales volume, sales value or production at which the business makes neither a profit nor a loss (the
"break-even point").
Graphical Depiction: Breakeven point = Total revenue –Total Cost = Zero
The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at various levels of
activity shown on the same chart as the variation of income (or sales, revenue) with the same
variation in activity. The point at which neither profit nor loss is made is known as the "break-even
point" and is represented on the chart below by the intersection of the two lines:

In the diagram above, the line OA represents the variation of income at varying levels of production
activity ("output"). OB represents the total fixed costs in the business. As output increases, variable
costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output,
Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income,
and hence neither profit nor loss is made.
 Fixed Costs
Fixed costs are those business costs that are not directly related to the level of production or
output. In other words, even if the business has a zero output or high output, the level of fixed
costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of
investment in production capacity (e.g. adding a new factory unit) or through the growth in
overheads required to support a larger, more complex business.
Examples of fixed costs:

- Rent and rates
- Depreciation
- Research and development
- Marketing costs (non- revenue related)
- Administration costs
 Variable Costs
Variable costs are those costs which vary directly with the level of output. They represent payment
output-related inputs such as raw materials, direct labor, fuel and revenue-related costs such as
commission.
A distinction is often made between "Direct" variable costs and "Indirect" variable costs.
Direct variable costs are those which can be directly attributable to the production of a particular
product or service and allocated to a particular cost centre. Raw materials and the wages those
working on the production line are good examples.
Indirect variable costs cannot be directly attributable to production but they do vary with output.
These include depreciation (where it is calculated related to output - e.g. machine hours),
maintenance and certain labor costs.
 Semi-Variable Costs
Whilst the distinction between fixed and variable costs is a convenient way of categorizing business
costs, in reality there are some costs which are fixed in nature but which increase when output
reaches certain levels. These are largely related to the overall "scale" and/or complexity of the
business. For example, when a business has relatively low levels of output or sales, it may not
require costs associated with functions such as human resource management or a fully-resourced
finance department. However, as the scale of the business grows (e.g. output, number people
employed, number and complexity of transactions) then more resources are required. If production
rises suddenly then some short-term increase in warehousing and/or transport may be required. In
these circumstances, we say that part of the cost is variable and part fixed.
 Break Even calculation:

BEP is calculated in order to determine as to at what level of sales the unit will be able to recover
the costs and will be generating profit at the sales level above BEP. The BEP is calculated as per
below mentioned formulae:-

Break Even Point (No. of unit) = fixed cost / contribution per unit
Where contribution (per unit) = Selling price (per unit) - Variable cost (per unit)
:
Break Even Point (Sales) ={fixed cost/ contribution (per unit)} * sales price (per unit)
Example:
For example we can use the following data to calculate breakeven point.
 Sales price per unit = Rs.250
 variable cost per unit = Rs.150
 Total fixed expenses = Rs.35,000
Calculation:
Sales = Fixed Cost + Variable Cost + Profit
Rs.250Q = Rs.35,000 + Rs.150Q + Rs.0
Where Q stands for quantity.
Rs.100Q = Rs.35000
Q = Rs.35,000 /Rs.100
Q = 350 Units
Q = Number (Quantity) of units sold.
The breakeven point can be computed by finding that point where profit is zero
The breakeven point in sales rupees can be computed by multiplying the breakeven level of unit
sales by the selling price per unit.
350 Units × Rs.250 p.u. = Rs.87,500 /
 Contribution Margin Method:
The contribution method is actually just a short cut conversion of the equation method already
described. The approach centers on the idea discussed earlier that each unit sold provides a certain
amount of contribution margin that goes toward covering fixed cost. To find out how many units
must be sold to break even, divide the total fixed cost by the unit contribution margin.
Contribution p.u. = Selling Price p.u. – Variable Cost p.u.
Break Even Point = Fixed Cost

Contrib. p.u.
BEP = Rs.35000 / Rs.100 p.u. i.e. 350 units
The following formula is also used to calculate breakeven point

Break Even Sales in Dollars = [Fixed Cost / 1 – (Variable Cost / Sales)]
Break Even Point = [Rs.35,000 / 1 – (150 / 250)]

= Rs.35,000 / 1 – 0.6
= Rs.35,000 / 0.4
= Rs.87,500
Branches should calculate BEP in all credit proposals involving sanction of fresh term loan of Rs. 20
Crore and above to part fund setting up of new units or expansion of existing facilities. A lower BEP
suggests that unit has adequate margin of safety. Margin of safety is computed as 1minus BEP and
indicates the proportion of sales which is available as cushion for any increase in variable costs and
is considered as profitability zone of the unit. The sanctioning authority should assess the viability of
unit in terms of BEP and justification of accepted BEP should be recorded in the proposal.
 Algebraic Technique
The calculation of BEP is done by Algebraic technique in two ways
i. Equation Method:
The Break-Even point can be calculated by equation method. Under this method we use the
marginal cost equation for calculating Break-Even point. The marginal cost equation is as follows:
Sales-Variable Cost=Fixed Cost+ Profit
This is written also in the following form:
S-V=F+P
Because, the relation of sales and variable costs is at the same level of production and sales, so the
formula written as:
SP(X)-V(X)= F+P
The formula can also be written as:
(Profit being Zero at BEP)
SP(X)=F+V (X)
But there is no profit no loss at BEP, so following formula at BEP will be
SP(X)=F+V (X)
Here X= Number of unit
Example: M/s Soni Electronics produces an electric-instrument and sells 400 units at Rs. 10.00 per
unit. The variable cost is Rs.7.00 per unit and fixed costs are Rs.900 per annum. Calculate the
break-even point
Solution:
We shall find out the Break-Even point by using the equation
SP(X)=F+V (X)
Putting the known values in equation we get
10X=900+7X
10X-7X=900
3X=900
X=900/3=300 units
Thus break even will take place at the production and sale of 300 units.
If we want to calculate BEP in rupee sales then it can be calculated by multiplying number of units
at BEP by selling price per unit. In above example BEP in rupees+ 300 units X Rs10 = Rs. 3000

ii. Contribution Margin : This technique has already been illustrated above
 Margin of Safety:
The margin of safety is defined as a difference between sales at a break-even point and total actual
sales. The margin of safety is useful when the sales of organizations are at risk. The margin of
safety is a measure of risk. It represents the amount of drop in sales which a company can tolerate.
Higher the margin of safety, the more the company can withstand fluctuations in sales. A drop in
sales greater than margin of safety will cause net loss for the period.
Hence Margin of Safety (%) = Actual Sales –BEP Sales X 100

Actual Sales
 Benefits / Advantages of Break Even Analysis:

The main advantages of breakeven point analysis are that it explains the relationship between cost,
production, volume and returns. It can be extended to show how changes in fixed cost, variable
cost, commodity prices, and revenues will affect profit levels and break even points. Break even
analysis is most useful when used with partial budgeting, capital budgeting techniques. The major
benefits to use break even analysis are that it indicates the lowest amount of business activity
necessary to prevent losses.
 Assumption of Break Even Point:

The Break-even Analysis depends on three key assumptions:
1. Average per-unit sales price (per-unit revenue):

This is the price that you receive per unit of sales. Take into account sales discounts and special
offers. Get this number from your Sales Forecast. For non-unit based businesses, make the per-
unit revenue $1 and enter your costs as a percent of a dollar. The most common questions
about this input relate to averaging many different products into a single estimate. The analysis
requires a single number, and if you build your Sales Forecast first, then you will have this
number. You are not alone in this, the vast majority of businesses sell more than one item, and
have to average for their Break-even Analysis.
2. Average per-unit cost:
This is the incremental cost, or variable cost, of each unit of sales. If you buy goods for resale,
this is what you paid, on average, for the goods you sell. If you sell a service, this is what it
costs you, per dollar of revenue or unit of service delivered, to deliver that service. If you are
using a Units-Based Sales Forecast table (for manufacturing and mixed business types), you can
project unit costs from the Sales Forecast table. If you are using the basic Sales Forecast table
for retail, service and distribution businesses, use a percentage estimate, e.g., a retail store
running a 50% margin would have a per-unit cost of 0.5, and per-unit revenue of 1.
3. Monthly fixed costs:
Technically, a break-even analysis defines fixed costs as costs that would continue even if you
went broke. Instead, we recommend that you use your regular running fixed costs, including
payroll and normal expenses (total monthly Operating Expenses). This will give you a better
insight on financial realities. If averaging and estimating is difficult, use your Profit and Loss
table to calculate a working fixed cost estimate—it will be a rough estimate, but it will provide a
useful input for a conservative Break-even Analysis.

As per Domestic Loan Policy 2014, the branches should calculate BEP in all the credit proposals
involving sanction of fresh term loan of Rs. 20 Crores and above to part fund setting up of new
units or expansion of existing facilities.
 Limitations of Break Even Analysis:

(1) It is best suited to the analysis of one product at a time. It may be difficult to classify a cost as
all variable or all fixed; and there may be a tendency to continue to use a break even analysis
after the cost and income functions have changed.
(2) Conditions of growth and expansion in a business activity not assumed.
(3) Fixed costs do not always remain constant.
(4) Variable costs do not always vary proportionately.
(5) As in case of costs/expenses, sales revenue also does not always change proportionately.
(6) BEP analysis is applicable only in short run since in the long run all costs are variable cost and
there is no such thing as fixed cost in the long run.

7. DOCTORING OF BALANCE SHEET (CREATIVE ACCOUNTING)
Quick Bites: Firms/companies that manipulate their expenses and revenues to manage
reported earnings often do it in subtle ways that are hard to detect. However, the
experts say that some careful "sleuth work" by the well informed finance savvy bankers
can often search it out. How can you detect whether a company is following
WorldCom’s example and manipulating its expenses to manage corporate profits?
A lender or an investor takes a decision

on the basis of information furnished in
the published balance sheets, but what if
the information itself is wrong. It is like
crossing India-Pakistan Border without
knowing where the land mines are. Spate
of scandals involving "creative
accounting" have distorted the pristine
image of audited Balance Sheets of
companies.
The satirical saying attributed to a Pseudo Osama "Forget terrorism, I want to be an Accountant"
underlines the extent of damage which accounting juggleries can create. The recent shenanigans
associated with financial statements have made accountancy profession suspect and target of
criticism and the Accounting Professionals are being looked upon as potential lawbreakers. Under
the circumstances, the common investors / lenders are bewildered and need a few simple
techniques to decipher doctoring of balance sheets, glamorously known as "Creative
Accounting", which is quite frequently resorted to not only by private entrepreneurs, but also by
piously regarded public sector undertakings. Creative accounting capitalizes on loopholes in
the accounting standards to falsely portray a
better image of the firm or company.
 IND AS (A New Approach) Vs Creative Accounting:
Government of India has notified the IFRS converged, Indian Accounting Standards (Ind-AS) in
February 2015. The earliest voluntary adoption of these standards is for the year 2015-16. These
standards will be mandatorily applied to financial statements of both public sector as well as private
sector companies for the year 2016-17 if those companies have that have their net-worth at Rs 500
crore or above in 2015-16. These standards will be mandatorily applicable to the financial
statements for year 2017-18 for both private and public sector companies with net-worth at Rs. 250
Crore and above in the year 2016-17.
The application of Ind-AS will bring about a paradigm shift on how entities report their
profitability and financial position. To have a check on creative accounting IND AS has a
framework which encapsulates that
A-Lease: The classification of leases is subjective, meaning that there is scope for manipulation.
Moreover, it is possible to structure a lease agreement so that the lease appears to be an operating
lease when it is actually a finance lease. This is a form of ‘creative accounting’. Ind-AS 17
requires that the classification of a lease should always reflect the substance of the
agreement.

B- Provisions: Ind-AS 37 prevents entities from recognizing excessive provisions by focusing on
the statement of financial position and applying the definitions and recognition criteria in the
Framework for the preparation and presentation of financial statements. A provision cannot be
recognized unless it represents a genuine liability.
 What is doctoring?
There are number of definitions of 'Doctoring" But all the definitions indicate that "An expression,
omission, misrepresentation or concealment of material fact made with the knowledge of its falsity
or in reckless disregard of its truth or falsity and with the intent to deceive another and that is
reasonably relied on by the other who is injured thereby". Thus, incompetence, poor
management does not constitute doctoring.
Doctoring of balance sheet involves steps which could appear to be within the four corners of the
law, but disaggregating them and understanding the implications facilitate reading between the
lines, and may reveal the real picture. Most of these steps aim at inflating revenue and deflating
expenses though in some cases, the other way round may also be true.
So, wading into mud of accounting requires a deep plunge into the accounting-world to know, at
least the most common, sleight-of-hand tricks, that companies play on unsuspecting investors /
lenders, to enable sniffing out the fishy business; (- but, remember, there is nothing illegal simply
because Indian Accounting norms are malleable ones and, as for creative accountants, there is no
dearth of that breed in India):
The doctoring is mainly relating to:

(1) Earning management - manipulates earning to achieve preconceived notion of expected
earnings.
(2) Income smoothing - manipulates to produce a steady growth of profit.
(3) Creative accounting or window dressing to produce expected result.
(4) Big bath accounting - heavy reduction of earnings by deferring revenues or accelerating write
off and/or to account for value of assets with extreme pessimism.
Inter-division transfers:
Several companies have more than one division / concern which carry out different Operations. In
the production / trade process, the output of one division/ concern may be used or, at least usable,
by other divisions / concern as input. In order to boost sales and consequently profits for the year,
a division / company may resort to "show" output sales to its division /concern.
The simple steps to find a near-correct picture are:
1) Aggregate the profits figures of all the group concerns and have an inter-year comparison.
2) Read the Balance Sheet-notes stating "Related Party Disclosures"- (AS -18).
Boosting year ending sales level vs. Sales Return:
Generally, at the end of the year / period, the higher volumes of sales are "recorded" without any
real transactions / physical movement of the goods, but fulfilling on record the basic conditions to
qualify such transactions as sales. Such sales boost the sales-level and consequently the profits for
the relevant year / period. This step is mostly used by consumer durable companies, which are
usually hard pressed to meet the targets. However, other companies too are observed to resort this
step.
At the end of the year / period, the higher volumes of sales are "made", fulfilling on record the
basic conditions to qualify such transactions as sales, to certain disgustedly associate concerns.
Such sales boost the sales-level and consequently the profits for the relevant year / period. At the
start of the next year / period, such sales are reversed as "Sales-returns". There is no ban if such
sales entries are reversed in the next year by mentioning that the order cancelled/ rejected.
The simple test to find a correct picture is

(1) To have inter-year comparison for at least last three years between cost of sales to sales. (Cost
of sales/ Sales x 100).
(2) The year showing an attractively lower ratio may in fact be the year when this common step
might have been resorted to.
(3) Ask for the figure of sales & sales returns during the current year is the better yielding step.
Excise duty (Presently replaced by GST):

Excise duty is an indirect tax, which means that the company collects it from the consumers and
pays back to the government. The correct practice is that excise-component is added to sales
revenue and at the same time, is shown as expenses in the Profit & Loss account leading to ZERO
effect on account of excise. Any departure from this practice, i.e., adding excise component to sales
revenue but not showing it as expenses or deferring its appearance in the Profit & Loss account
creates illusion of higher profits. Also, in course of inter-firm comparison, the company resorting to
this "smart" step may seem to be attractive.
The simple test is
(1) To ascertain relationship between excise duty and the sales in previous years and also in
current year for the industry / activity.
(2) Thereafter, make a snap calculation of excise payable and excise actually shown in the Profit &
Loss account. Any major difference needs to be probed into.
The readers to note that the excise duty is now replaced by GST. However, the balance sheets
pertaining to earlier period may continue to involve the excise duty.
Spreading income and cost - a below the line trick:

According to the accepted accounting practices, the effect of any transaction should be shown over
the time-horizon in which the benefit is derived or the expenses incurred. Thus, a simple trick
involves recording long-term income benefits over a shorter period than what they will actually
accrue over. Similarly, spreading out a cost over a longer time-horizon or straightway capitalizing it
to ensure a smaller / zero hit in the current Profit & Loss account.
Detection of such tricks actually necessitates deep study of the notes on the Balance Sheet,
Directors' Report and the Auditors report besides inter-year comparison of revenue and expenses
items.
Change in depreciation:
There are two methods for charging depreciation on assets - one is straight-line method where a
fixed amount is written off every year, and another is reducing balance method (written down
value) where a fixed percentage is written off on the reducing balance at the beginning of each
period. Depending upon the rates charged under the two methods, a change from one method to
the other would allow the quantum of the charged depreciation to change, thus, impacting the
Profit / Loss for that period.
Detection of such step is the easiest: just read the notes on Balance Sheet and the auditors' report.
There would be clear mention as to how change in depreciation has impacted the shown profit /
Loss.
Sometimes the company are not providing depreciation on plant and machinery under the pretext
that its plant and machinery are well maintained and promptly repaired which do not erode the life/
increase the life of the P&M. This is under SLM method of depreciation.
Deferment of revenue expenses:

The methodology is simple - Defer the current year's revenue expense from being debited to
current year's Profit & Loss Account, instead, show it in the Balance Sheet under "Miscellaneous
Expenses / Preoperative Expenses / Research & Development Expenses" so that the current year's
profit does not get impacted. Next years, do not amortize it to the debit of Profit & Loss Account,
but simply debit to "Reserves & Surplus" so that next years' profits too are not impacted.
TELCO did it when it wrote-off Rs 1178 crore of deferred revenue expenses (the development
expenses of ‘Indica car’); - by doing so, TELCO could show loss at around half of the actual loss
incurred. The simple test is to have inter-year comparison of Tangible Net Worth taking into
account the retained profits / losses and other accretions to the "Reserves & Surplus".
Big bath accounting or simulating income stream:

The company takes a leap in debiting the Profit & Loss Account in one year eying to show
"turnaround profits" in the next year so that in that next year, the already envisaged merger /
Public issue of shares or bonds or massive borrowing plan can materialize glamorously. It is a way
to clean up the books during the bad times so that when the tide turns, there is no impediment to
good performance.
Another way is to make huge provision in a good year with the intention to "write back" the
provision in a foreseeable bad year / period to even out the impact of prevailing realties. Also, huge
losses are booked in the Profit & Loss account in a bad year publicly known due to reasons beyond
control of the company and / or on account of remain immune from the public wrath.
The simple test is to reason out the suddenly ballooned expenses / losses / provisions.
Show one time gain as operating profit:

Showing profits on sale of investments as part of operating profits is the step nowadays mostly
resorted to even by new generation private banks and also by many PSBs. The driver in this
methodology is to befool the public / regulators by pumping-up the revenues and thus, profits.
A simple test is to reason out the sudden increase in "other income" / income from treasury
operations reveals the real picture.
Revenue expenditure as Capital expenditure:

Sometimes the expenses relating to profit and loss account are considered as capital expenditure
thereby increasing the size of the balance sheet and increasing the profit of the enterprise.
Steps to detect- verify the auditors note and ascertain the correctness
Revaluation of Brand/ Fixed Assets:

It is observed that many firms are adjusting their strength of balance sheet/ size of the balance
sheet by revaluation of brand/ fixed assets. This revaluation is often carried out to increase the
assets value of a company.
Steps - to verify and compare each increase in assets and sources also.
Why Boost the Balance Sheet?

Companies that manipulate their balance sheet are often seeking to increase their earnings power
in future periods (or the current period) or create the appearance of a strong financial condition.
After all, financially-sound companies can more easily obtain lines of credit at low interest rates, as
well as more easily issue debt financing or issue bonds on better terms.
Overvaluing Assets
 Provision for Doubtful Accounts
Accounts receivables play a key role in detecting premature or fabricated revenues, but they can
also be used to inflate earnings on their own by way of the provision for doubtful accounts. Of
course, the reserve for doubtful accounts will prove to be inadequate in the future if adversely
modified, but accounts receivable will receive a temporary boost in the short term.
Investors can detect when the reserves for doubtful accounts are inadequate by comparing
accounts receivable to net income and revenue. When the balance sheet item is growing at a faster
pace than the income statement item, then investors may want to look into whether or not the
provision for doubtful accounts is adequate by further investigating.
 Inventory Manipulation
Inventory represents the value of goods that were manufactured but not yet sold. When these
goods are sold, the value is transferred over to the income statement as cost of goods sold. As a
result, overstating inventory value will lead to an understated of cost of goods sold, and therefore
an artificially higher net income, assuming actual inventory and sales levels remain constant.
One example of manipulated inventory was Laribee Wire Manufacturing Co., which recorded
phantom inventory and carried other inventory at bloated values. This helped the company borrow
some $130 million from six banks by using the inventory as collateral. Meanwhile, the company
reported $3 million in net income for the period, when it really lost $6.5 million.
Investors can detect overvalued inventory by looking for telling trends, such as inventory increasing
faster than sales, decreases in inventory turnover, inventory rising faster than total assets and
falling cost of sales as a percentage of sales. Any unusual variations in these figures can be
indicative of potential inventory accounting fraud.
 Subsidiaries and Joint Ventures

When public companies make large investments in a separate business or entity, they can either
account for the investment under the consolidation method or the equity method depending on
their ability to control the subsidiary. Unfortunately, this leaves the door open to companies that
want to conceal and manipulate the true performance of their subsidiaries or joint ventures. Under
the equity method, the investment is recorded at cost and is subsequently adjusted to reflect the
share of net profit or loss and dividends received. While this is reported on the balance sheet and
income statement, the method does limit the information available for investors. For example, a
company could overstate interest coverage in order to change the leverage ratios of the subsidiary.
Undervaluing Liabilities
Pension obligations are ripe for manipulation by public companies, since the liabilities occur in the
future and company-generated estimations need to be used to account for them. Companies can
make aggressive estimations in order to improve both short-term earnings as well as to create the
illusion of a stronger financial position.
Companies can make themselves appear in a stronger financial position by changing a few
assumptions to reduce the pension obligation. Because the pension benefit obligation is the present
value of future payments earned by employees, these accounts can be effectively controlled via the
discount rate. Increasing the discount rate can significantly reduce the pension obligation
depending on the size of the obligation.

Meanwhile, companies can also use pension accounting in order to manipulate short-term earnings
by artificially changing the net benefit cost, or the expected return on pension plan assets, on the
income statement. While the estimate should be roughly the same as the discount rate, companies
can make aggressive estimates that will then affect the income statement. An increase in the
expected return on plan assets will reduce the pension expense in the income statement and boost
net income.
Contingent Liabilities
Contingent liabilities are obligations that are dependent on future events to confirm the existence of
an obligation, the amount owed, the payee or the date payable. For example, warranty obligations
or anticipated litigation loss may be considered contingent liabilities. Companies can creatively
account for these liabilities by underestimating their materiality.
Companies that fail to record a contingent liability that is likely to be incurred and subject to
reasonable estimation are understating their liabilities and overstating their net income or
shareholders' equity. Investors can avoid these problems by carefully reading a company's
footnotes, which contain information about these obligations.
 Suggested Checks………
Inculcate reading beyond the Profit & Loss Account and the Balance Sheet:
(1) Study (a) the "notes" to the Balance Sheet / Profit & Loss account; (b) directors' report; (c)
Chairman's report; (c) Auditors' report more immaculately than the care shown in analyzing the
figures appearing in Profit & Loss Account and Balance Sheet; they carry more revealing
information than what the Profit & Loss Account and / or the Balance Sheet depict. Particularly,
work out the following nine ratios: Current ratio, Debt Equity ratio, Operating profit margin,
Net profit margin, Retained profit ratio, Inventory turnover ratio, Debtors turnover ratio,
Return on capital employed and DSCR. Compare all these ratios with the accounts with the
branch/bank.
(2) Watch the Cash Flow; if profits are going-up, but the cash in-flow is flat, it is clear indication of
imminent tornado.
(3) Check Sundry Debtors / Receivables; if the level is rising disproportionate to the rise in sales
and especially if their amount outstanding for more than 6 months is steadily rising, it spells
trouble since the company is not realizing what is owed to it.
(4) Do not blindly rely on any "analyst"; - the experts don't commit mistakes; they commit
blunders! Always have a self-check / re-look.
(5) Get alarmed of frequent / big-ticket mergers /acquisitions; they may camouflage the shit. In
such a situation, first disaggregate the merged balance sheet and than read them individually.
(6) Ensure that authorized capital, shown in the Balance Sheet, is in conformity with the
Memorandum of Association (amended up to date) and the relevant Form SH-7 & MGT -14
filed with Registrar of Companies.
(7) In case the company has made any recent issue of shares, peruse the details of allotment and
compliance with the Registrar of Companies; - remember, bonus shares can not be issued out
of revaluation reserves.
(8) Have a look on the annual return filed with Registrar of Companies regarding promoters'
contribution;
(9) Remember that application money can be retained for a maximum of 60 days as current
liability only and during this period, this should not be treated as part of capital / NOF because
allotment of securities should be completed within 60 days from the receipt of application
money. If not so allotted, the company should repay application money within 15 days
thereafter, failing which it should be repaid along with an interest at 12% p.a.
(10) Capital Reserves and Revaluation reserves are not to be treated as part of TNW.
(11) Investments in associate / group concerns are to be ensured to be genuine, strategic, and are
to be accounted for at present real value;
(12) No company is permitted to borrow in excess of 30% of its NOF nor is permitted to invest by
way of deposits / advances in another company in excess of 30% of Its NOF or 30% of NOF of
the investee company whichever is lower unless permitted by annual general meeting of the
company.
(13) Always ensure that the Balance Sheet that you are relying on is audited by a Chartered
accountant and the auditors' report is an integral part of the balance sheet perused by you.
Simply certifying a balance sheet by a chartered accountant without use of the word "audit" has
no value and it is nothing but a compilation of accounting data by a accounting professional
without any onus / responsibility. Such certified balance sheet or certificate needs to be viewed
more skeptically. Further, audit of a balance sheet should not be a pretext to abandon a re-look
on the balance sheet and financials by the lender.
(14) If the auditor of the company's balance sheet is also a tax consultant / financial consultant of
the borrower, beware of the auditor's vested interests in the company's published financials.
Remember the saga of Arthur Anderson!

8. TYPES OF CREDIT FACILITIES
Objectives
This chapter deals with types of credit facilities which are sanctioned to borrowers/ customers i.e.
Overdraft, Cash Credit, Demand Loan, Term Loan, Packing Credit, Bills Purchase/Discounted,
Guarantee, Letter of credit etc.
Background
Bank sanctions various types of credit facilities to its customers / borrowers as per their need. It
mainly depends on the purpose of the loan, periodicity of the loan, availability of security, etc.
Credit facilities extended by bank can be broadly classified into two categories viz. fund based and
non-fund based. When bank sanctions a loan and the fund is immediately available to the borrower,
such types of credit facilities are known as fund based. On the other hand, there are certain types
of credit facilities which do not involve deployment of funds at least at the initial stage though in
contengencies funds are also involved and may crystallise into a fund based liability for the Bank
are known as non-fund based advances. Bank earns interest on fund based credit facilities and
other related charges. It earns commission, fees, service charges, etc. on non-fund based credit
facilities. Non-fund based credit facilities are very remunerative and profitable for both the Bank
and the borrower.
Advances can also be granted to the borrowers either on secured basis or unsecured basis. When a
tangible asset of the borrower is taken as a security by the bank for lending him, the advance could
be called 'Secured Advance'. When the amount is lent to the borrower only on the basis of his own
creditworthiness without insisting on tangible security like land, building, plant or stocks the
advance is called 'Unsecured or Clean'.
Various Credit Facilities available to borrowers
Various kind of funded credit facilities viz. Term Loan/Demand Loan, cash credit, overdraft, bill
finance, pre-shipment, post-shipment etc. are available to the borrower besides non-fund based
facilities such-as bank guarantee, letter of credit and co-acceptance. These are traditional method
of lending. Apart from the above traditional facilities, bank’s/FIs are also extending some innovative
method of lending viz. ECB, Buyer’s credit, Supplier’s Credit, FCNR (B) loan, Factoring, forfeiting,
commercial paper, etc. which are more competitive and cost effective.
We are explaining the credit facilities in two broad heads – Traditional credit facilities and
Innovative credit facilities.
Traditional Credit Facilities
Traditional credit facilities extended by bank can be classified into two categories viz. fund based
and non-fund based. When bank places certain funds at the disposal of borrowers and borrowers
avail these funds, such types of credit facilities are known as fund based. However, there are
certain types of advances which do not involve deployment of funds at least at the initial stage
though in contingencies Funds are also involved. These are called non-fund based advances.

Traditional Credit Facilities
Fund Based Facilities Non-Fund Based Facilities
Term Loan/ Working Guarantee Letter of Derivatives

Demand Loan Capital Credit
Overdraft Cash Credit Bill Finance Export Finance Working

Capital
Demand Loan
Clean Secured Pledge Hypoth Clean Docume Pre Post

ecation ntary Shipment Shipment
Salient Features of these facilities are as under:
A. LOAN
The loan is disbursed by way of single debit/stage-wise debits (wherever sanction so accorded)
to the account. The amount may be allowed to be repaid in lump sum or in suitable
installments, as per terms of sanction. Loan is categorized Demand Loan if the repayment
period of the loan is less than three years and if the repayment of the loan is three years and
above the loan is categorized as Term Loan.
B. OVERDRAFT
When a customer is maintaining a current account, a facility is allowed by the bank to draw
more than the credit balance in the account; such facility is called an 'overdraft' facility. (At the
request and requirement of customers temporary overdrafts are also allowed.) However, against
certain securities, regular overdraft limits are sanctioned.
Salient featuresof overdraft account are as under:

i. All rules applicable to current account are applicable to overdraft accounts mutatis
mutandis.
ii. Overdraft is a running account and hence debits and credits are freely allowed.
iii.Interest is applied on daily product basis and debited to the account on monthly basis. In
case of temporary overdraft, interest should be applied as and when temporary overdraft
is adjusted or at the end of the month, whichever is earlier.
iv.Overdrafts are generally granted against the security of government securities, shares &
debentures, National Savings Certificates, LIC policies and bank's own deposits etc. and
also on unsecured basis.
v. Overdraft for working capital purposes is allowed in schematic lending for business
purposes for flexibility of customers and where verification of stocks and DP is difficult.

C. CASH CREDIT
A cash-credit is an arrangement to extend short term working capital facilities under which the
bank establishes a credit limit and allows the customers to borrow money upto a certain limit for a
maximum period of -12- months. Under the system, bank sanctions a limit called the cash-credit
limit to each borrower upto which he is allowed to borrow against the security of stipulated tangible
assets i.e. stocks, book debts, etc. The customer need not draw at once the whole of the credit limit
sanctioned but can withdraw from his cash-credit account as and when he needs the funds and
deposit the surplus cash/funds proceeds of sale etc., into the account. Besides this, the facility of
frequent and unrestricted transactions is available.
In terms of the bank’s guidelines, all the authorities now sanction a combo-limit of Cash Credit
(Hypothecation of stock-cum-book debt) even if the borrower requests for only Cash Credit
(Hypothecation of stock) facility or only Cash Credit (Hypothecation of Book-debts) facility. An
authority in JMGS-I to MMGS-III can sanction against hypothecation of book-debts, provided the
borrower offers sufficient tangible collaterals (i.e. tangible collateral security at least 75% of the
limit).
Salient features of cash-credit system are as under:

a. Sanction of limit: Bank sanctions the cash-credit limit after taking into account several
features as detailed in the foregoing chapters. The drawings are restricted up to the
sanctioned limits.
b. Calculation of drawing power: Based on the value of security charged to the bank, the
stipulated margin is reduced and the advance value is calculated subject to overall limits.
Branches should not allow drawings in cash-credit accounts beyond the drawing power.
However, interest and other charges may be debited exceeding drawing power. Drawing
power is calculated on monthly basis.
Actual drawings in cash credit accounts will be allowed lower of sanction limit or
drawing powers.
D. BILL FINANCE:
Pre-sales activities from procuring raw material to manufacturing of finished goods are financed
by extending cash credit facility whereas the post sales requirement are financed either by way
of granting facilities against bills or against the book debts. Bankers prefer to grant bill finance
which provides an excellent medium for settlement of a trade transaction.
Under bills finance mechanism a seller of goods draws a bill of exchange (draft) on buyer
(drawee), as per payment terms for the goods supplied. Such bills can be routed through the
banker of the seller to the banker of the buyer for effective control.
(i)Clean & Documentary bill:

a) When documents to title to goods are not enclosed with the bill, such a bill is called Clean Bill.
When documents to title to goods along with other documents are attached to the bill, such a bill is
called 'Documentary Bill'.
b) Documents, the due possession of which give title to the goods covered by them such as RR/MTR,
bill of lading, delivery orders etc. are called documents to title to goods.
c) Cheques and drafts are also examples of clean bills.
(ii)Demand & Usance bill:

When the bill of exchange either clean or documentary is made payable on demand or sight, such a
bill is called Demand Bill. The buyer is expected to pay the amount of such bill immediately at sight.
If such a demand bill is a documentary bill, then the documents including document to title

to goods are delivered to the buyer only against payment of the bill. (Documents against payment-
DP Bills).
When a bill, either clean or documentary is drawn payable after certain period or on a specified
date, the bill is called Usance Bill. Such bill is presented to the buyer once for Acceptance, when he
accepts to pay the bill on due date and on due date the bill is presented again for Payment. In case
of documentary usance bill, the documents are delivered to the buyer (drawee/acceptor) against his
acceptance of bill (Documents against acceptance - DA Bills).
(iii) Finance against bills of exchange: Difference between BP/BD

Banks consider working capital finance to meet the post sale requirements of borrowers through Bill
finance either by 'Purchasing' bills or 'Discounting' them.
a) Bill Purchase facility is extended against clean demand bills like cheques /drafts/bills of
exchange/ hundies & demand documentary bills, whereby the bank lends money to the
payee of the cheque/draft and to the drawer of the bills by purchasing the same against tendering
of such bills by the payee/drawer. The bank in turn sends the bills for collection, preferably to its
own branch at the place of drawee or to its correspondent bank or to the buyers (drawee's) bank.
b) Bills Discounting facility is extended against usance bills. In such cases, the seller tenders
the usance bill drawn by him usually alongwith documents to title to goods, to his banker
who discounts the bill i.e. levies discount charges for the unexpired portion of the duration of the
bill and credits the balance amount to the seller's account. Thereafter the drawer's bank sends the
bill to collecting bank at the centre of drawee either to its own branch or drawee's bank, with
instructions to release the documents to title against acceptance and thereafter, to recover the bill
amount on due date. Sometimes the accepted usance bills are also tendered and discounted by the
bank.
E. EXPORT FINANCE
It is Endeavour of the government of India to give all possible encouragement for promoting
exports from the country. Apart from other benefits offered by the Government of India, banks
grant export credit on very liberal terms to meet all the financial requirements of exporters. The
export credit can broadly be divided into two groups as under-
1. Pre-shipment advances/ Packing credit advances
Financial assistance sanctioned to exporters to enable them to manufacture/ procure goods meant
for exports and arrange for their eventual shipment to foreign countries is termed as ‘pre-shipment/
packing credit advance’. In fact all facilities granted to exporter upto shipment stage will be
grouped under this category. Following forms of pre-shipment facilities are available to the
exporters-
(i) Packing credit in Indian rupees
(ii) Packing credit in foreign currency(PCFC)
2. Post Shipment Advances
After completion of shipment of goods for exports, the exporters in almost in all cases require to
draw a bill on foreign buyer for submission to his banker for collection. The bill purchase/discount
facility granted to the exporter is covered under post-shipment credit. The exporter has to raise his
claim of duty drawback etc. on various government agencies after completion of export and may
approach his banker to sanction him credit facilities against these claims. Following facilities of post-
shipment facilities are available to the exporters-

a) Post-shipment credit in rupees
b) Foreign Currency Bills Purchased (FCBP)/ Discounted (FCBD)
c) Post-shipment Demand Loan(PSDL)
3. ECGC Cover:
Bank has opted for the following two whole turn over guarantees of Export Credit Guarantee
Corporation of India Ltd. :
(i) Whole Turnover Packing Credit Guarantee. (WTPCG)

(ii) Whole Turnover Post-shipment Guarantee. (WTPSG)
Under these guarantees all the advances at pre-shipment stage and post-shipment stage are
automatically covered. The branch has to ensure the prompt remittance of monthly premium within
the stipulated time, at the stipulated rate on daily product basis for advances outstanding
under pre-shipment and post-shipment heads, to the debit of borrower's account.
 The WTPSG opted by the bank also covers the shipments under letters of credit.
 The claim if any, shall be considered by ECGC only if all the stipulations under the whole
turn over guarantees are fulfilled like :
(a) All the sanctions/review/deviations etc. are to be reported to ECGC in the prescribed format
in a prescribed time limit.
(b) The terms of the sanction should be fulfilled and for deviations if any, proper confirmation
from competent authority should have been obtained
Some Innovative Methods of Lending
# Type of the Purpose/Meaning Eligibility Cost Security Tenure

Product
(A) Bridge Loans/ To meet temporary Corporate with Available at Current Matching
Short-term Loans cash flow good credit MIBOR / Assets with Cash
mismatches rating LIBOR Flows
(B) Commercial Paper Short-term Highly rated depending on Unsecured 7 days to
borrowing corporate rating one year
Denomination of having
CP Note - `5 Lakhs minimum net
or multiples worth of
thereof Rs. 4.00 crores
& Credit rating
of P2 or
equivalent of
credit rating
agencies
approved by
RBI, Primary
Dealers,
Satellite
Dealers & FIs

(C) Factoring Outright sales of Corporate Nominal Receivable Continuous
the receivables of having large service s process
a firm to another numbers of charges
agency specializing debtors compensated
in the by saving in
management of managing
trade credit called receivables
the factor in-house
(D) Forfeiting Discounting export Exporters Fixed rate Bills of Medium to
receivables basis Exchange long -term
discount maturities
(E) Securitization of Discounting certain Continuity of depending on Quality of Continuous
Future Receivables or near certain specific rating receivable process
cash flows business and s
borrowers’
ability to
perform
consistently
(J) Channel Financing Purchase bill Distributors depending on Bill of Continuous
discounting who purchases rating Exchange, process
wherein Bills of goods from Post dated
exchange reputed cheque
(BoE) drawn by a corporate (PDC),
Corporate on its Invoice &
distributors is Transport
discounted by the proof
Bank & proceeds
are directly paid to
the seller
(Corporate).
(K) Cash Management Cheque collections deposited in banks are credited on the date of deposit or
Products prior to the date of clearing as per the arrangement with the bank. This is
done at a nominal fee for the service provided but it improves the cash
flows considerably when collections against sales are spread over remote
locations.
(L) External For investment in Corporate As per RBI Choice of More than
Commercial real/ industrial registered guidelines – security to 3 years
Borrowings/Trade sector and under the Linked with be
Credit (Buyers infrastructure Companies Act LIBOR provided
Credit/Sellers except financial to the
Credit intermediaries lender/
(such as supplier is
banks, financial left to the
institutions borrower
(FIs), housing
finance
companies and
NBFCs)

(M) FCNR-B Loans Loans against Generally to LIBOR + Fixed/Curr
FCNR Deposits Corporate who ent Assets
(Foreign have natural
Currency) hedge due to
exports
(N) Supply Chain Purchase bill Distributors depending on Bill of Continuous
Finance discounting who purchases rating Exchange, process
(3 Products :- wherein Bills of goods from Post dated
Vendor Finance, exchange (BoE) reputed cheque
Dealer Finance, drawn by a corporate (PDC),
Payable Finance)# Corporate on its Invoice &
distributors is Transport
discounted by the proof
Bank & proceeds
are directly paid to
the seller
(Corporate).
The above-mentioned major products are mainly to meet the shortfall in working capital and
working capital requirements of the business and are offered by Nationalised Banks, Private Banks
and Foreign Banks (depending upon the credit rating of the borrower).
# Readers may refer circular no. BCC:BR:109:372, dated 04.07.2017, for further
information.
i. Venture Capital Financing

Venture Capital Financing refers to financing of new high-risk venture promoted by qualified
entrepreneurs who lack experience and funds to give shape to their ideas. In broad sense, under
venture capital financing venture capitalist make investment to purchase equity or debt securities
from inexperienced entrepreneurs who undertake highly risky ventures with a potential of success.
Some common method of venture capital finance is as follows:
Equity financing
Conditional loan
Income Note
Participating Debenture
Presently there are 80 Foreign Venture Capital Investors (FVCI) and 90 Venture Capital Funds (VCF)
registered with SEBI (Securities Exchange Board of India). For details please visit
http://www.sebi.gov.in/investor/venturecap.html
ii. International Financing

There are various avenues available to raise funds from the international market. Euro Issues,
Global Depository Receipts (GDR), American Depository Receipts (ADR) and Foreign Currency
Convertible Bonds (FCCB) are more popular in India.
iii. Euro Issues

Euro Issues are listed on a European Stock Exchange. Finance can be raised by Global Depository
Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs) and pure debt bonds.

iv. Euro Convertible Bonds
A Convertible bond is a debt instrument, which gives the holders of the bond an option to convert
the bond into predetermined number of equity shares of the company. The bonds carry a fixed rate
of interest. Such bonds may carry 2 options viz.
(i) Call Option (Issuer’s Option)
(ii) Put Option (Holder’s Option)
v. Global Depository Receipts (GDR)

GDR is negotiable certificate, denominated in US dollar that represents a non-US company’s publicly
traded local currency (Indian Rupee) equity shares.
vi. American Depository Receipts (ADR)

Depository receipt issued by a company in the USA is known as ADRs. Such receipts have to be
issued in accordance with the provision of Security and Exchange Commission of USA.
vii. Foreign Currency Convertible Bonds (FCCB)

FCCB means bonds issued in accordance with the scheme and subscribed by a non-resident in
foreign currency and convertible into ordinary shares of the issuing company in any manner, either
in whole, or in part, on the basis of any equity related warrants attached to debt instruments.
viii. Private Equity Funding

Private Equity is also known as equity finance, equity loans, venture capital or private venture
capital. PE can be defined as investment in unlisted companies not quoted on a stock exchange and
is usually seen as an alternative (or an addition) to the more traditional forms of finance such as
bank debt. It includes forms of venture capital and MBO financing. PE can be derived from a
number of areas such as superannuation funds, overseas investors, other companies, high net
worth investors, a venture capitalist or venture capital firms.
PE enables entrepreneurs to achieve success that may otherwise have been beyond reach by
providing resources over and above money. Success of PE Fund is dependent on success of the
venture. PE funds make sure that their star entrepreneurs are helped with all the resources and
learning which can be mustered by the fund to help them realise their dream.
Typically if a private equity investor agrees to invest in a company, they will require some kind of
representation on the board and hold a shareholding in that company. Normally these investments
lack security and as a consequence a venture capitalist will be looking for high returns on their
investment which means they will be aiming to identify companies with high growth potential.
The private equity investor or venture capitalist aims to exit the business usually 3 to 7 years after
the investment through the company listing on the stock exchange, selling the business or through
a management buyout. Accordingly, the primary return on investment from equity funding is usually
through capital gain at the exit stage. Private equity finance is suitable for less mature companies
with developing or under developed concepts or revenue as well as for more mature established
companies to finance expansion or turnaround strategies.
Private equity investors will examine the following key areas when considering a loan investment:
 Strength of Management
 Business Strategy
 Target Market
 Competition
 Innovation

Whether the business is a start up or an existing company, any period of forecasted growth will
bring additional risks which may also stretch the financial requirement beyond the current
capabilities of the company. Bank debt may prove to be too restrictive on cash flow or even
impossible to obtain. In these circumstances equity funding may provide the much needed capital
base as well as the support to achieve goals.

Test your Learning
1. Credit facilities granted to a barrower against tangible securities, are known as

a. Tangible advance
b. Unsecured advance
c. Secured advance
d. Clean advance
e. Non of the above
2. What kind of working capital would be sanctioned to a travel agency to run its business?
a. Working Capital Demand Loan
b. Cash Credit
c. Overdraft
d. Term Loan
e. None of the above
3. It is an outright sale of receivables of a firm to another agency specializing in the

management of trade credit, what is activity known as?
a. Discounting export receivables
b. Factoring
c. Discounting bills
d. Finance capital goods
4. Which of the following is relevant to Packing Credit limit?

a. Pre-sale limit
b. Post-sale limit
c. It is granted for packing of finished goods
d. It covers both A and B
5. What do you understand by Bridge Loan?

a. It is a method to finance infrastructure projects
b. To finance capital goods for longer period
c. To meet temporary cash flow mismatches
d. Term loan finance
6. Which of the following is not a method of venture capital finance?

a. Equity financing
b. Commercial Paper
c. Conditional loan
d. Income Note
e. Participating Debenture
7. Letter of credit is governed by which of the following?

a) FEDAI rules
b) FEMA guideless
c) UCPDC 600
d) URC 725

8. Which one of the following is not a type of bank guarantee?
a. Performance guarantee
b. Credit Guarantee
c. Financial guarantee
d. Deferred Payment Guarantee
9. Which one of the following is an innovative method of lending?

a. Term Loan
b. Forfeiting
c. Cash Credit
d. Overdraft
e. Bill discounting
10. Purchase/discount of bill drawn by a Corporate on its distributors is

Discounted by the Bank and proceeds are directly paid to the seller –
what is this activity known as?
a) Channel Financing
b) Term Loan to acquire capital goods
c) Bill Financing
d) None of the above
11. Exposure means :-

a. Only fund based limits
b. Only non fund based limits
c. Fund based + Non fund based limits
d. Fund based limits + 50% of non fund based limits
12. LC and BG are :-

a. FB limits
b. NFB limits
c. As good as FB limits
d. None of the above
e. Derivatives
13. In case of bill discounted under Prime Bank LC where due date is confirmed by that
Prime Banker, then our exposure is on :-
a. Borrower
b. That Prime Banker
c. Both a & b
d. Supplier
14. Drawings in CC A/c. are regulated by :-

a. Limit sanctioned
b. Tangible security available
c. Advance value
d. Drawing power

15. Normally, book debts upto how many days are considered for DP calculation ?
a. Entire
b. Upto 90 days
c. Upto120 days
d. Beyond 90 days
e. Upto 180 days
16. What is more appropriate :-

a. Sanctioning a CC limit of Rs.10 lacs
b. Sanctioning a LABOD of Rs.100 lacs
c. It depends upon what is the realistic requirement of the borrower
d. It depends upon the what type of credit campaign is going on in the Bank at that
time
e. MPBF depends on the value of the security
17. Bill discounting is a :-

a. Pre sale limit
b. Post sale limit
c. It can be both pre sale and post sale
d. Packing Credit
18. Packing credit is given for :-

a. To meet the Packing and Wrapping cost of finished goods
b. For manufacture of goods meant for domestic sales
c. For manufacture of goods meant for export sales
d. For liquidating overdue FBP limit
19. Packing credit can be given in :-

a. Only foreign currency
b. Only local currency
c. Both local and foreign currency
d. None of the above
e. Only in Indian Rupees
20. TL is normally sanctioned for funding :-

a. Working capital requirement
b. Capex requirement
c. Non fund requirement
d. All of the above
e. Import requirement of Inventory
Answers:
1 2 3 4 5 6 7 8 9 10
C C B A C B C B B A
11 12 13 14 15 16 17 18 19 20
C B B D B C B C C B

9. WORKING CAPITAL FINANCE AND BILL FINANCE
1.1 Objectives
This handout deals with the rationale behind need of assessing working capital for smooth conduct
of economic activities in a business/ manufacturing unit. This chapter deals in depth various
components of current assets, methods used to assess the working capital requirement of a unit
along with promoting bill culture in the system.
1.2 Introduction
i. Any business enterprise whether engaged in manufacturing or purely trading activity, has to
have sufficient capital to finance both, its fixed assets, viz. land, building, machineries, etc. and
current assets for smooth conduct of day to day business activities/ production schedule.
ii. The term “”Working Capital” refers to the Current Assets of any business unit. The quantum of
current assets required for a smooth functioning of business is dependent on the various factor
like nature of the activity, availability of the raw materials, Operating Efficiency or
Installed Capacity, Technology Employed, level of production, storage capacity and
funds available. So the funds/ capital actually required to maintain this required level of
current assets, is called the Gross Working Capital.
iii. Out of the level of gross working capital, required as above, the borrower raises the necessary
funds from many sources, viz.: Share Capital, Retained Profits, Bank Borrowings, Trade
Creditors, Advance from Purchasers, etc.
iv. Out of the above, credit available in the form of trade creditors and advance from purchasers
etc., are sources of finance which are short term in nature and are available as per trade
practices and market conditions. The remaining resources are, therefore, to be raised from own
capital or through bank borrowing. Such short-term credits available to the firm are called
current liabilities and the difference of gross working capital and the current liabilities is called
the 'Net Working Capital'.
1.3 Net Working Capital
Diagrammatically the above can be shown as per exhibit.
LIABILITIES ASSETS
CAPITAL FIXED ASSETS
+ RESERVES
+ INVESTMENT
= Net Worth
+ LONG TERM BORROWINGS + NON CURRENT
ASSET
NWC from LTS for total WC requirement
CURRENT LIABILITIES
CURRENT ASSET

i. The firm requires an amount of capital to maintain its level of assets comprising of fixed
assets and current assets.
ii. The level of current assets is partially met by capital raised through current liabilities.
iii. The total current assets are called the gross working capital.
iv. Current Asset less Current Liabilities excluding Bank Borrowings is Working Capital Gap
(WCG).
v. The borrower is required to raise the resources equivalent to Working Capital Gap either
from long term sources or through short term bank borrowings.
vi. Out of this, if he brings in some amount, from long term sources, viz. capital, long term
debts, etc., the remaining amount is the amount required to be financed by the Bank. So
the appraisal of working capital finance by the bank requires computing the required level of
current assets and current liabilities besides the amount to be brought in by the borrower
from long term resources. The share of the borrower which comes from long term sources is
also known as Net Working Capital.
In other words,
Total Current Assets – Total Current Liabilities = Net Working Capital
1.4 Appraisal of Bank Finance
The appraisal of bank finance for working capital thus involves the following steps:
A) Estimation of the Level of Gross Working Capital (GWC)
B) Estimation of the Level of Current Liabilities (OCL other than Bank)
C) Computation of Net Working Capital Gap (WCG)
D) Computing the share of NWC Gap required to be brought by the borrower as Margin.
(NWC)
E) Computation of the Level of Bank Finance. (PBF)
1.4.1 Estimation of the Level of Gross Working Capital
For a systematic and proper estimation of the gross working capital requirements of a firm, it is
essential to identify its various components and analyze them in detail.
A. Operating Cycle Theory:
i. To estimate the gross working capital requirements, the understanding of the operating
cycle of manufacture/production is very important.
ii. The function of any manufacturing unit is to procure raw materials, process the same to
produce finished goods, sell the finished goods and realize money and utilize the money so
received, to procure raw material again and to continue the cycle all over again.
iii. Besides, the cost of raw material, labor charges, electricity, water, rent etc. are also
incurred during the period of processing. All this requires funds/capital.
iv. Once the goods are produced, it may not be sold immediately and it may have to be
stored in a godown for some days before they are sold. Storing of such finished goods
involves cost of raw material used in such finished products, labour and other
manufacturing expenses incurred in producing them, etc.
v. It is not necessary that all the goods will be sold in cash. Some goods will be sold on
credit. Till such time sale proceeds are not realized, funds are blocked in such receivables.
vi. Finally, when the sales proceeds are realized, the funds are again used to procure raw
material, etc. as above and the whole process/cycle starts all over again.
vii. The total time taken from the purchase of raw material, till realization of sale proceeds is
called the operating cycle and the amount of capital/funds required to sustain this cycle is
called the gross working capital. This is also called Cash to Cash Cycle or Working capital
cycle.
B. Components of Gross Working Capital:
In any typical manufacturing unit, the components that constitute the gross working capital or
current assets are as under: Raw materials, Consumable stores and spares, Stock in process,
finished goods, Receivables, Cash and bank balance, other current assets.
(a) Raw Materials:
For a systematic assessment of the level of raw material requirements, following factors are to
be considered:
i. Types of raw materials required,
ii. Sources of raw material,
iii. Availability of raw materials,
iv. Mode of transportation of the raw material,
v. Period for which the raw materials are required to be stored before they, are taken out for
processing,
vi. Terms of purchase of raw materials,
(b) Consumable Stores and Spares and packing material:
All the aspects covered in above are applicable for estimating the amount of consumable stores,
spares and packing material required in the manufacturing process also. The average stock in terms
of number of days is to be worked out.
(c) Stock in Process:
Once the raw material is taken up for processing, it goes through various stages of production. The
time taken for such conversion depends upon number of operations and time taken for each
operation, etc. Further, additional expenses like wages, salary, fuel, power, water, depreciation etc.,
are also incurred during the manufacturing process. When these expenses are added to the cost of
raw material and locked up in various stages of production, it will form the cost of stocks in process.
Cost of production: Raw material consumed in a year + spares consumed + depreciation +
manufacturer expenses + overheads + opening stocks in process - closing stock in process.
Average stock in process: Opening stock in process + Closing stock in process) / 2
Stock in process (No. of days): Average stock in process x 365

Yearly cost of production
(d) Finished Goods
Depending upon the demand and market for the product, the finished goods may be required
to be stored for some period before they are finally sold. This involves blocking of capital on
these finished goods. The quantum and value of these finished goods will be determined by:

Physical characteristic, i.e. perishable, hazardous, loses weight on storage, types and
varieties of finished goods, demand for the product, location of the market and dispatch
time, seasonality of the product etc.
Cost of sales = Cost of production + opening stock of finished goods + purchase of
finished goods - closing stock of finished goods
No. of days of Finished Goods = Average stock of finished goods x 365
Yearly Cost of sales
(e) Sundry Debtors/Receivables
The nature and period of credit to be given to the customers depends upon various factors,
viz.
Nature of the product, Demand for the product, Credit worthiness of purchasers , Reputation
of the seller, Competition in the market and trade practices.
The period of such credits varies from industry to industry and area to area.
No. of days of debtors: Average Sundry Debtors x 365
Annual credit sales
No. of days of Export Receivables: Average export receivables outstanding x365/ Annual
export sales
No. of days of domestic Receivables: Average domestic receivables outstanding X 365 /Annual
domestic sales
(f) Cash and Bank Balance:
Every unit requires some liquid cash and balance in current account with bank to meet urgent
day to day requirements. Such requirements should be minimum. Estimation of the level of cash
and bank balances is dependent upon the policy of purchases, sales, past holding, etc. As such
past trends and trends in similar units would be the bench mark for determining such levels.
(g) Other Current Assets:

Usually the following items are included in the "Other Current Assets:
Advance payment to suppliers of raw material, etc.
Advance payment of taxes, excise duties. Cash etc.
The level of these items can be generally gauged from past figures and requirements of the
unit.
1.4.2 Estimation of the Level of Current Liabilities
Once the gross working capital or current assets are computed as above, it is essential to find out
the amount of credit available to the borrowers in purchase of raw materials, advance payment
received from buyers, deposits from dealers, provisions for statutory liabilities, etc.
If usance letter of credit facility is proposed, the period of credit available due to availment of such
letter of credit facilities should be reflected in the level of sundry creditors.
Projected level of sundry creditors should be reasonable with reference to the quantum of
purchases, market practice and past trends.

1.4.3 Computation of Net Working Capital
Net working capital is defined as gross working capital minus total current liability.
Total Current Liability is Short Term Bank Borrowing + Other Current Liabilities.
If short term bank borrowings is NIL, then the gross working capital is financed entirely by
other current liability (and NWC). Normally it is not the case.
So the difference between gross working capital and other current liabilities (excluding bank
borrowings) is called the working capital gap. The question is how much of this gap is to be
financed by the bank and how is the borrower required to make up the remaining amount.
1.5 Various Methods of Lending
Various committees have been set up by RBI to suggest the methods of lending. Following are
some of the methods of lending introduced in banks from time to time:
i. Tandon / Chore committee recommendations
ii. First method of Lending
iii. Second Method of Lending
iv. Nayak Committee Recommendations for SSIs (Now SMEs)
v. Vaz Committee Recommendations for Non-SSIs
vi. OUR BANK’S PERMISSIBLE BANK FINANCE SYSTEM
(A) First Method of Lending (I METHOD) :

Under the first method of lending, the borrower is required to contribute a minimum of 25%
of the working capital gap from the long term sources. The balance amount i.e. 75% of the
working capital gap represents the maximum permissible bank finance (MPBF). Where the net
working capital is more than the amount required to be provided (i.e., more than stipulated
25% of WCG) by the borrower, the maximum permissible bank finance would get reduced to
that extent. To ensure compliance under this method of lending, the current ratio of the
concern should not be less than 1.17:1 . However ratio norms will be applicable as per bank’s
extant guidelines. ( For Micro and small enterprises 1.17 and medium enterprises 1.20)
(B) Second Method of Lending (II METHOD) :

The second method of lending stipulates that the borrower is required to contribute a
minimum of 25% of the total current assets from the long term sources(Net Working Capital)
irrespective of the working capital gap. The maximum permissible bank finance will, therefore,
be working capital gap less the amount to be so contributed by the borrower. Where the net
working capital is more than the stipulated minimum contribution (i.e., more than 25% of
TCA), the maximum permissible bank finance would get reduced to that extent. To ensure
compliance under this method of lending, the current ratio of the concern should not be less
than 1.33:1.

The above two methods can be illustrated by an example given hereunder:
Current Liabilities Current Assets

Creditors for purchases 100 Raw materials 200
Other current liabilities 50 Stock-in-process 20
Total Current Liability other than Bank 150 Finished goods 90
Borrowings
Bank borrowings including bills 200 Receivables including bills 50
discounted with bankers discounted with bankers
Other current assets 10
Total Current Liabilities 350 Total Current Asset 370
1st Method 2nd Method
Total Current Asset 370 Total Current Asset 370
Less: Current Liabilities other than 150 Less: 25% of Current Asset 92
bank borrowings
Working Capital Gap 220 278
Less: 25% of Working Capital Gap 55 Less: Current Liabilities other than 150
bank borrowings
Maximum Permissible Bank Finance 165 Maximum Permissible Bank Finance 128
Excess borrowing 35 Excess borrowing 72
Minimum Current Ratio 1.17:1 Minimum Current Ratio 1.33:1
In the example, it is observed that under the first method of lending the borrower is entitled for an
MPBF of 165 only, whereas he has availed bank borrowing of 200, thus resulting in an excess
borrowing of 35.
Under the second method the MPBF works out to 128 only and the excess borrowings increases to
72. The borrower is thus, required to bring in additional long term funds of Rs. 35/- and 72/- under
first and second method of lending respectively.
( C) Nayak Committee Method:

Under this method originally proposed for SSI borrowers and later made applicable for all borrowers
with Fund based Working Capital limits upto Rs.5/- crore, the computation is made at 20% of
projected gross sales as under.
The gross working capital is uniformly assumed to be a minimum of 25% of projected gross sales.
On this, the borrower is required to maintain a margin equivalent to (5% of the accepted projected
turnover) 20% of gross working capital computed as above. The bank finance on projected sales of
Rs. 100/- would be:
(a) (accepted) Projected Sales Rs.100/-
(b) Gross Working Capital Rs. 25/-
(c) = (20% of b)(=5% of (a)) Minimum margin required Rs. 5/-
(b-c) or 20% of projected sales Minimum bank finance Rs. 20/-
For MSME under Regulatory frame work, the working capital assessment has to be done by both I
Method of lending and Turnover Method and the higher of the two, is the eligible finance.
actual drawal should be allowed on the basis of drawing power available in the account

As per BCC/BR/109/103 dated 16.02.2017 some modifications have been made for turnover
method.
 For Micro and small enterprises whose fund based working capital requirements
are upto 5 crores working capital credit limit increased from minimum 20 % of projected
accepted turnover to 25 %.
 Introduction of additional 5% WC Credit Limit for turnover through digital mode
i.e., total 30 % of the portion of the assessed projected accepted turnover of the entity
expected to be carried out through digial mode for MSE with FB working capital requirement
up to Rs 5 crores is assessed as working capital Credit Limit, provided that minimum 25 %
of projected accepted turnover is by way of digital mode.
Assessment under Turnover Method is as below:
Sr. no. Particulars topic Revised guidelines

1. Micro & Small enterprises FB 25 % of Projected accepted
WC limit (upto Rs 5 cr) turnover or first method of
lending which is higher
Margin 6.25 % of Projected accepted
turnover
2. Digital portion For Digital portion of Micro & 30 % of portion of turnover
Small enterprises FB WC limit which is projected to be
(upto Rs 5 cr) digitally transacted
Margin 7.5 % of portion of turnover
which is projected to be
digitally transacted
 Digital transaction means sales transactions other than cash and paper based
instruments.
 This assessment is applicable to both new and existing units.
 If turnover consists digital based turnover also (minimum 25%) then separate
working capital limit for digital and non digital mode would be derived 30% and 25%
respectively and after then add separate limits to take aggregate limit.
Example:
Projected Turnover Rs 10 cr
Out of which : Digital mode = Rs 4 cr
As digital mode is more than 25 % then we will derive seprate for deigital and non digital mode.
1. Digital mode
Turnover method Amount
a Projected accepted turnover 10
b Accepted Digital Mode Turnover 4
c 37.50 % of b digital turnover ( 30% limit +7.5% 1.5
margin)
d Minimum margin 7.5 % of b digital turnover 0.30
e Actual NWC (for example taken minimum margin) 0.30
f Owner margin ( higher of above twos e and f) 0.30
g MPBF(c-f)= 1.50-0.30 1.20

2. Non digital mode
Turnover method Amount

a Projected accepted turnover 10
b Accepted Non-Digital based Turnover 6
c 31.25 % of b non digital turnover ( 25 % limit +6.25% 1.88
margin)
d Minimum margin 6.25 % of b digital turnover 0.38
e Actual NWC (for example taken minimum margin) 0.38
f Owner margin ( higher of above twos e and f) 0.38
g MPBF(c-f)= 1.88-0.38 1.50
The final limit as turnover method will be = limit for digital mode + limit for non digital= 1.20+1.50
= 2.70 cr
We will also derive first method of lending and then higher amount between turnover method and
first method of lending will be sanctioned limit.
Please note that if turnover by digital mode is less than 25 % of turnover then whole limit will be
derived considering non digital mode .
Though the assessment is as above, actual drawal should be allowed on the basis of drawing power
available in the account
Inventory/Receivable Norms:
As per the original recommendations of the Tandon Committee and Chore Committee, norms were
prescribed for maintaining levels of inventory and receivables by selected types of industries.
However, as per existing guidelines, banks can henceforth assess the credit requirements of
borrowers based on total study of borrowers' business operations i.e. taking into account the
production/processing cycle of the industry, as well as the financial and other relevant parameters
of the borrowers. Accordingly, banks can decide the levels of holding of each item of inventory as
also of receivables, which in their view would represent a reasonable build up of current assets for
being supported by bank finance.
Now the bank is circulating industry reports published by Risk Management Department, Baroda
Corporate Centre, which contain inter-alia inventory/ receivable norms for various industries. The
branches are advised to assess the working capital requirement taking into account these norms as
guiding factors.
However, there may be instances, when the borrowers may request for allowing them to exceed
the norms in circumstances beyond their control like:
a. Bunched supply of materials both indigenous and imported.

b. Power cuts, strikes and other interruptions in operations.
c. Transport delays and bottlenecks.
d. Accumulation of stocks due to non-availability of shipping space.
e. Build-up of stocks of finished goods (machinery), due to delay in taking delivery by the
purchaser for whom they were specifically manufactured.
f. (It is normal practice to obtain substantial advance/ progress payment in respect of such
tailor-made orders to preclude, inter-alia, the possibility of failure on the part of the purchaser
to take delivery).

To cover material required for executing large export orders during short duration (i.e. not
anticipated in the annual projections assessed by the bank). Such requests for exceeding the norms
maximum upto 20% of the standard norms/past trends may be acceded to in all genuine cases,
provided, the bank is satisfied that:
a. The requested deviation is justified;

b. The borrower is not habitually exceeding the standard/past trends levels, when they are not
warranted;
c. The borrower will make every effort to bring down the levels within a reasonable period.
d. Where the financing of the unit is also subject to additional controls like Selective Credit
Controls directives, or control by other authorities, viz. Textile Commissioner, Jute
Commissioner, etc., the inventory/receivable levels reckoned for calculating MPBF should be
the lowest among all the levels (including prescribed/past levels) permitted.
Computation of the Level of Bank Finance:

After ascertaining the margin or NWC to be brought by the borrower appropriate to the method of
lending applied, the level of Bank Finance should be assessed.
Computation of Bank Finance also depends upon the Method of Lending
After ascertaining the gross working capital, other current liabilities and available margin or NWC to
be brought by the borrower appropriate to the method of lending applied, the level of Bank Finance
should be assessed as under:
1 Total Current Assets Total Current Assets (Gross Working Capital)
2 Total Current Liabilities Total Current Liabilities other than bank
other than bank borrowings (OCL)
borrowings (OCL)
3 Working Capital Gap = (1-2) (Gross Working Capital – Other Current
Liabilities)
4.Maximum permissible ==(3- (a) Actual Projected Net Working Capital (NWC)
bank finance (MPBF) Margin)
(NWC = Total Current Assets - Total Current
=Working Capital Gap - Liabilities)
Margin
Out of (a) or (b) Minimum margin required as per applicable
(b) method
whichever is
I method - 25% of Working Capital Gap (WCG)
higher is to
be II method - 25% of (TCA) Total Current Assets
considered
as Margin
(D) Working capital assessment of SSI/SMEs units

As per BCC:BR:107/12 dated January 5, 2015 ,our bank dispensed away with the quantum of
limits for assessment of WC limits of MSME & hence assessment of WC limits of MSME may
be done on the basis of in respect of units under:
1. Non-Regulatory segment-by Second method of lending adopted.

2. Regulatory definition- by “Turnover method‟ or “First method of lending‟, whichever is
higher.

(E) PERMISSIBLE BANK FINANCE (PBF) SYSTEM:
i. BACKGROUND:
a. Reserve Bank of India has directed that Working capital credit may be determined by banks
according to their perception of the borrower and the credit needs. Banks should lay down,
through their boards, transparent policy and guidelines for credit dispensation in respect of
each broad category of economic activity.
b. In the above said context, our Bank has decided to replace the system of assessment of
working capital finance, based on MPBF-computations, i.e. the Tandon Committee
recommendations by a new system of assessment of working capital finance called
Permissible Bank Finance (PBF) System.
c. As a consequence of the withdrawal of the existing system of working capital finance based
on "MPBF-system", a large leeway is available to the bank to adopt a new method/system.
The PBF system has retained, with appropriate modifications, the strengths, and removed
the weaknesses, of existing MPBF-system simultaneously doing away with its rigidities as
regards computation of working capital bank finance, and supervision & monitoring of the
credit dispensed by the banks thus, the new system ensures faster credit delivery with
INHERENT need & merit based flexibilities.
ii. CASH REQUIREMENT LENDING (Cash Budgeting Method)
a. By projecting future cash receipts & disbursements, the cash budget enables the corporate
to determine its cash needs. We, therefore, shift emphasis from the "Security Obsessed
Lending to the "CASH REQUIREMENT LENDING" which is envisaged to be a need based
lending. Cash flow financing, thus, conceives self-liquidating finance during various time-
zones unlike the present MPBF system.
b. THE CASH REQUIREMENT LENDING is aimed at to perceive the borrower's requirement,
rather than to monotonously assess with arithmetical rigidities, after the necessary risk-
analysis and risk-perceptions on case to case basis with perusal of the acceptability of the
borrower's estimated Cash Flow-position as per his overall financial status, projected level of
liquidity & activity, market reports, industry/activity profile and the economic strata which a
particular borrower belongs to.
c. This information is readily available in the financial newspapers & periodicals, for example,
“CMIE” and “Capitalole” industry - analysis software. In case of need, the branch manager
/other authorities may take assistance /guidance from higher authorities. Cash requirement
financing imposes its own discipline, such as, sound resource planning, receivables
management, purchase planning and management of inventory. Working Capital finance on
the basis of future cash flows facilitates a more holistic view of the company’s earning
capacity rather than on the basis of its capacity to maintain a particular asset holding level.
d. If there is Cash Deficits under all the three Heads, viz., from trading operations, from non-
trading operations and from Balance Sheet items; then, the Working Capital finance shall be
eligible only upto the extent of Cash Deficit from Trading Operations. However, at the same
time, the borrower shall be required to explain as to how the deficits in other two Heads
shall be taken care off.

iii. APPLICABILITY:
The PBF system shall be applicable for all borrowers engaged in legally permitted economic /
financial activities. Following categories of borrowers shall not be covered under PBF system
excepting the following:-
1. NBFCs (Non banking Finance Companies)

2. Construction Companies/Contractors
3. Tea Companies Working Capital finance
4. Ship breaking companies
5. Diamond Industry
6. Sugar, Gur & Khandsari Companies
7. Software Companies (Existing separately set out guidelines to be in force)
8. Other specific industries: Industry specific guidelines, if provided, to apply.
As per the directives of Reserve Bank of India to arrive at the need-based working capital finance
based on the turnover method or Cash Flow method, besides retaining the existing concept of
Maximum Permissible Bank Finance (MPBF), Bank has formulated and issued guidelines namely
Permissible Bank Finance (PBF) for C&I lending. In case the MPBF turns out to be negative as per
Second Method of Lending, the working capital requirements may be assessed based on Cash
Budgeting Method.
iv. RISK FORCASTING:

Detailed risks-analysis carried out with the intra-firm comparison, and also inter-firm comparison if
necessary, of the borrower’s financial & operational statements and projections;
Risk-perceptions based on the interface with the borrowers, the market reports, industry / activity
profile, managerial components, government policies and cross-country risks as applicable.
In this regard, a Risk-score sheet may be drafted according to the case specific merits till some
standardized format (s) are circulated by our bank.
v. CURRENT RATIO
It is stated that the current ratio is calculated with reference to Current Assets and Current
Liabilities.
Under the Turnover Method, the borrower’s own margin / contribution towards Working Capital is
fixed @ 5 % or 6.25% or 7.50% on the acceptable projected turnover, as the case may be.
Therefore, both are different.
Further, in addition to the borrower’s own contribution / margin and the bank borrowings, there
may be Sundry Creditors for purchases, liabilities for expenses, liabilities for payment of term loan
installments maturing within the year etc. All these affect the Current Ratio.
vi. DEBT EQUITY RATIO
concern. Bank takes total term liabilities as Debt i.e. total liabilities minus net worth and total
current liabilities. Equity means net worth of the concern minus intangible and fictitious assets.
may be considered as quasi-equity, generally for non-corporate borrowers, and included in equity
while arriving at ratio, if the borrower retains the same at the existing level/ projected level during
the currency of Bank Loan. The subordinated debt however should not exceed borrower’s tier I
capital i.e. capital plus free reserves less intangible assets.
Debt-Equity Ratio = Total Term Liabilities (TTL)/Tangible Net Worth (TNW).A ratio of 3:1 is
considered satisfactory.
Apart from DER (TTL/TNW), bank assesses the Debt Equity Ratio as Total Outside Liabilities (TOL)
to Tangible Net Worth (TNW) also. Total Outside Liabilities (TOL) will be calculated as total of all
liabilities of a company/firm on liability side of balance sheet MINUS the net worth. A ratio of 4.5:1
of DER (TOL/TNW) may be considered satisfactory.
vii. FUNDS INVESTED OUTSIDE BUSINESS

The funds invested outside business can be considered excessive when, for example:
a. It is not under statutory / mandatory / obligatory requirements; or,
b. It is made otherwise than to acquire or to retain controlling interests in associate/ group
concerns; or,
c. It is made with sole intention to derive returns on surplus funds without reducing/
liquidating Working Capital borrowings from the banking system.
d. It is in disproportionate percentage to Tangible Net Worth, say, in excess of 50% of the
Tangible Net Worth as per last audited Balance Sheet. However, the aforesaid 50% is not
meant to be a benchmark and the “disproportion” is to be reckoned with after considering
overall financials, purpose & tenor of the investments etc.
ix. ASSESSMENT OF WC LIMITS
As per BCC:BR:107/12 dated January 5, 2015 ,our bank dispensed away with the quantum of
limits for assessment of WC limits of MSME& hence assessment of WC limits of MSME may be
done on the basis of in respect of units under
1. Non-Regulatory segment-by Second method of lending adopted.
2. Regulatory definition- by “Turnover method‟ or “First method of lending‟, whichever is
higher.
actual drawal should be allowed on the basis of drawing power available in the account
x. LINE OF CREDIT
Under the PBF-method, a Line of Credit (i.e., the outer limit for entire working capital finance)
shall be fixed, within which, the borrowers shall be given freedom to select, for full one year or for
a part of the year, sub-limits in one or more out of the various existing types of credit facilities.
xi. DRAWING POWER
The disbursal of the operative / sanctioned Fund Based limits shall be regulated through periodical
statements of stock, book-debts etc. subject to observance of the assumed / relevant parameters
under the new PBF-method.
Periodicity of submission of stock / book-debts statements and of carrying out periodical inspections
/ verifications by the Bank’s Officials, and the certifications by the Chartered Accountants etc. are to
be as per the Bank’s extant guidelines. This periodicity may be fixed by the sanctioning authority as
quarterly, monthly or of lesser periodicity.
Further, In respect of allowing drawings against Book-Debts, the terms of sanction and the bank’s
extant guidelines in this regard shall be the guiding factors to include or exclude book-debts
exceeding 90 days.
The branch should control drawing power in any eligible account using HCLM command in finacle.
xii. QUARTERLY MONITORING REPORTS
The Quarterly Monitoring Reports, as prescribed under PBF System have replaced the existing
Quarterly Information Systems.

The QMR will be different for different categories i.e. the borrowers requiring Working Capital
finance upto Rs.500 lacs, more than Rs500 lacs but upto Rs1000 lacs and more than Rs1000 lacs.
Regulation of drawings shall continue to be based on stock /book-debts statements etc
xiii. FIXATION OF OPERATING LIMIT

For fixing the operative limit, instead of present QIS, the proposed quarterly monitoring reports
shall be obtained.
For the borrowers financed under the cash budget, the Cash Budget shall be obtained on quarterly
basis to fix the operative limits and also to monitor it.
xiv. INSPECTION OF SECURITIES
The periodical verification / inspection of the Current Assets and Current Liabilities is to be carried
out periodically.) by the bank’s officials at regular intervals and the peridiocity of carrying out
inspection depends on the credit rating of the account as mentioned in the Domestic Loan Policy of
the Bank.
For the purpose of the periodical inspections, in accordance with the existing guidelines, the
inspection-report may comment upon how the inspecting officer(s) has satisfied himself about the
correctness of quantitative details of stocks; and Valuation of Stocks; proper safety, security and
movement of stock; how the inspecting officer(s) has satisfied that stock is not overly unpaid vis-a-
vis the assessed level of credit, old age receivables, further turnover therein and whether they are
considered good of recovery; and which are the registers / records perused to specifically comment
whether the unit is having proper system of inventory management and control.
Stock /Book-Debts audit in respect of borrowal accounts having exposure (FB+NFB including DA
LC) of Rs. 5 crs and above from our Bank, shall be carried out twice in a financial year, preferably
once in a half year.
Stock /Book-Debts audit in respect of borrowal accounts having exposure (FB+NFBincluding DA
LC) of Rs. 1 crs and above but less than Rs.5 crs from our Bank, shall be carried out once in a
financial year.
Notwithstanding the frequency as mentioned above, Stock/ Book-Debt Audit may be conducted at
more frequent intervals (i.e. more than once/twice in a year) if deemed necessary by the Bank.
Henceforth, said requirement shall applicable to all accounts including accounts under multiple
banking or consortium with leadership of other banks. However for this purpose, stock audit carried
out through other banks (under multiple/ consortium) shall also be acceptable.
xv. ADHOC / EXCESS
Before sanction of any adhoc / excess over the sanctioned limit (whether funded or non-funded
facility), the borrower shall be asked to submit a proper Cash Flow statement so as to satisfy
timely adjustment/ liquidation of the adhoc/excess. The adhoc/excess may be subjected,
at the discretion of the sanctioning authority, to a levy of additional interest upto 2.00 % p.a.
to meet the cost of arranging uncommitted & suddenly needed funds / obligations for the adhoc /
excess.

xvi. COMMITMENT CHARGE
To monitor borrowers to utilize sanctioned working capital facilities and for effective deployment of
resources ,the bank has decided to levy commitment charge in case of non utilisation
/underutilization of working capital limits for advances accounts with fund based working capital
limits of Rs. one crore and above .Commitment charges are to levied on quarterly basis at following
rates:
1. Where average utilization is up to 60% of the limit or as indicated in Q.I.S statement, no
commitment charges to be recovered separately.
2. Where the average utilization is below 60% of the limit or as indicated in Q.I.S statement,
commitment charges to be recovered @0.50% p.a (plus service tax)
3. In case of line of credit, the average utilization of non fund based facility can be counted
as utilization for arriving the overall under utilization.
xvii. BILL CULTURE
The Reserve Bank of India has advised that banks have already been given freedom to decide their
own guidelines for assessing / sanctioning working capital limits of borrowers, they may sanction
working capital limit as also bills limit to borrowers after proper appraisal of their credit needs and
in accordance with the loan policy as approved by their Board of Directors.
xviii. GENERAL GUIDELINES

a. Wherever any of our borrower is having multi-division activities/businesses, the
working capital credit requirement shall be perceived/assessed separately for each of the
division as is done at present.
b. For the Post-shipment export credit limits, the borrower has some pre-plans / orders for the
export-turnover. This can be accounted for while working out PBF. However, wherever, the
requirement arises due to sudden opportunity, it can be dealt with on the line of
consideration of adhoc / specific limit requirement.
c. In case the unit is doing only job work, the unit incurs only conversion / value addition cost
and earns a margin on the same. The conversion / value addition cost + margin represents
the turnover which can be taken into account for perceiving the Working Capital
requirement on turnover method. Under Asset based method, the value addition material
and receivables etc. require Working Capital finance and accordingly be considered.
Under Cash Requirement lending, the peak level cash deficit can easily be worked out to
perceive Working Capital finance. A similar treatment can be given for the units which are
getting the job-work done by other units.
d. Whenever there is wide variation of the Working Capital finance assessed under the new
PBF-method with the Working Capital finance assessed under the existing system based on
MPBF, it should be noted that the sanction of the limits is to be as per the methods
suggested under the new guidelines. But, regulation of the drawings shall continue to be
based as per the existing practice.

1.6 Working Capital Term Loan (WCTL)
While implementing the norms for inventory and receivables and applying the prescribed method of
lending, borrowings of the concern from the bank for working capital, may be more than the
maximum permissible bank finance resulting in excess borrowing. Such excess borrowings occur
basically due to excessive holding of current assets and shortage of net working capital. It should
be regularized by realizing the current assets held above the permitted levels and by augmenting
long term sources, which would improve the net working capital. However, where such excess
borrowings, due to shortage of net working capital, could not be regularized in time, they should be
transferred to a separate account styled as "Working Capital Term Loan (WCTL)". This account
should be repaid over a period, not exceeding five years, depending upon the projected cash
generation and in suitable installments.
WCTL is not a separate facility, but only a portion of the existing excess borrowings segregated and
set apart for better control and repayment over a period of time. The balance in the WCTL should
continue to be covered by the advance value of stocks as in the case of cash credit.
WCTL once granted, should not be increased or fresh WCTL granted to the same party for any
reason and effective steps should be taken to recover the amount as originally envisaged. It should
be ensured that the WCTL component is not enhanced at the time of increase in WC limit and the
additional limits are considered on the basis of incremental current ratio of 1.33:1 or 1.17:1 as the
case may be.
Excess drawings due to excess inventory or receivables, should be liquidated by
consuming/disposing off such excess stocks or recovery of the receivables. A time bound
programme, not exceeding six months, should be drawn up for this purpose in consultation with the
borrower. Genuine reasons or difficulties, if any, should be taken into account while determining the
period for adjusting the excess drawings. Such cases should be referred to the higher authorities
with full particulars, as to the reasons why the inventory cannot be reduced to the permissible level
within six months and instructions sought.
WCTL should not be considered where the deficit in the net working capital is due to cash losses
suffered by the undertaking.
Where the borrowing unit exports a substantial part of its production and the WCTL has to be
carved out of the existing packing credit limit, the bank may identify the WCTL on a notional basis
in view of the concessional rate of interest applicable to such packing credit (i.e. the amount of
excess borrowing may be identified, but not transferred to a separate WCTL, so that concessional
rate continues to be available for the permissible time). It may, however, be impressed upon the
borrowers that they should bring in the required contribution within the stipulated period of five
years.
1.7 Ad-hoc Facilities
i. Ad-hoc facilities over and above the sanctioned limit or MPBF can be considered by branches
on a case to case basis, subject to administrative guidelines issued from time to time and
within their delegated discretionary powers.
ii. Such facilities usually are not to be granted for a period exceeding 2/3 months as per DLP.
iii. Additional interest of 2% per annum over sanctioned rate should be charged on the ad-hoc
limit.

1.8 Guidelines for Allocation of Sub-Limits
Where a borrower requires allocation of sub-limits at different branches, branch should examine the
request carefully and satisfy itself that such a request is warranted in the interest of the concern.
The guidelines in this regard are as under:
i. The request should be referred to the Regional Authority with full details and comments on
the conduct of the account.
ii. Zonal Authorities are authorized to consider allocation of sub-limits at branches located within
the zone. In other cases, reference should be made to the Central Office and their approval
obtained.
iii. The branch to whom the sub-limit is transferred should not grant any excess in the account
without the written consent of the base branch. Details of all excesses allowed should be
reported to the base branch.
iv. The branch, to whom the sub-limit is transferred, should inform the base branch, once in a
month, the outstanding balance in the account. Any other information or adverse features
noticed should promptly be advised to the base branch.
v. As the stock statement/position of other securities will only be available at the base branch,
they should advise, once in two months, the branches, to whom the sub-limits are transferred,
about the available security and advance value with suitable instructions to regulate the
drawings within the available advance value.
vi. Base branch should forward copies of renewal sanction advices to the branches, to whom the
sub-limits are transferred.
Parking of limits/sub-limits at other branches
 Detailed guidelines regarding transfer of borrowal accounts, credit facilities, sub-limit
from one branch to another.
 Review of the account by the base branch
 Advising drawing power by base branch to transferee branch on regular basis.
 Carrying out periodic inspections and reporting thereof to the base branch wherever
applicable,
 Advising base branch immediately about irregularities in the conduct of the account
with the transferee branch.
1.9 Slip Back in Current Ratio
Generally, current ratio of any borrowing unit should improve over the years and it should not
deteriorate. In other words, the net working capital of the borrower in absolute terms as well as in
relation to the working capital gap should improve.
Guidelines under MPBF System :

However, relaxation in the above may lead to deviation as per bank’ latest guidelines. as a special
case, for the following purposes in the case of units which have a good past performance record
and which have built up a sound current ratio over a period of time. But this deviation is applicable
i. For undertaking either expansion of the existing capacity or for diversification.
ii. For fuller utilization of existing plant capacity.
iii. For meeting a substantial increase in the unit's working capital requirements on account of
abnormal price rise.

iv. For investment in allied concerns with the concurrence of the bank, if such an investment is
considered necessary in the business interest of the borrowing unit e.g. for procuring of raw
materials etc.
v. For bringing about a reduction in the level of deposits accepted from the public for complying
with the statutory requirements.
vi. For repayment of the installments due under foreign currency loans and other term loans.
vii. For rehabilitation/reviving weaker units in the 'Group' by allowing flow of funds from cash rich
units in the group subject to the condition that no amount is lent to a healthy unit of a 'Group'
for its working capital requirement is transferred to another unit within the group so as to
reduce the Current Ratio of the transferor unit to a level below 1.33:1.
viii. While permitting relaxation, it should be ensured that the current ratio of at least 1.33:1 is
maintained. In other words, the relaxation should not result in reducing the unit's contribution
from the long-term sources below a minimum of 25% of its current assets.
ix. Borrowers who are in the first method of lending stage (i.e. whose contribution from the long
term sources of funds is less than 25% of the current assets) should not normally be allowed
to expand their activities without bringing in additional equity or raising term loans, so as to
ensure that their financial structure is not weakened as a result of expansion. However, in
exceptional cases, relaxation may be permitted for temporary period in regard to the units
which can reasonably be expected to make good, the gap out of cash generation within a
short period. Cases of such units should be constantly reviewed.
x. The slip back in the current ratio should not normally be allowed except under the
circumstances indicated in the foregoing paragraphs. It should particularly be noted that units
which have diverted their funds outside the business, by giving loans and advances not in the
nature of advance payments for raw materials, etc. and units which seek to enlarge their
investments in other concerns not approved by the bank/s, should not be allowed diminution
in their current ratio under any circumstances.
xi. Slip back in the current ratio in respect of 100% export oriented units and sick units should be
examined on merits on case to case basis.
1.10 Working Capital Facilities under Consortium
i. In the case of borrowers to whom working capital limits are financed by consortium of
banks, it will be the responsibility of the Lead Bank for preparation of appraisal note, its
circulation, arrangement for convening meetings, documentation etc.
ii. The Lead Bank is also vested with the responsibility of arranging for sanction and disbursal
of credit, monitoring of the borrowal account, advising share of member banks in the
monthly/quarterly operative limits.
iii. The Lead Bank will also be responsible for submitting prescribed data/information to the RBI
on behalf of the consortium.
iv. Given below is the gist of guidelines pertaining to operational aspects of financing working
capital under a consortium :
a. The appraisal of credit proposals will be done exclusively by the Lead Bank, if its share in
the consortium exceeds 50% of the fund based limits. In other cases, the appraisal will be
done by a team comprising the Lead Bank and the bank having the next largest share in
the limits.
b. On submission of all the necessary papers and data by the borrower to the
Lead Bank regarding appraisal of the limit, the Lead Bank will prepare the necessary
appraisal note and circulate the same to other member bank for their perusal and
observations/objections if any.
c. The entire work relating to appraisal should be completed by the Lead Bank within 2
months of submission of proposal by the borrower.
d. The member banks are required to study the appraisal note prepared by the Lead Bank
and communicate their observations/objections etc. to the appraisal note to the Lead Bank
within a specified time.
e. After receiving the observations from the member banks the Lead Bank will call a
consortium meeting to approve the appraisal note, sharing of limits, charging securities,
inspection of securities, etc.
f. At the above meeting the member banks discuss the appraisal note and the company is
given an opportunity to explain the queries of the member banks/Lead Bank. After
discussion the consortium may approve the limits, sharing pattern etc. and decide about
the modality of disbursing the facilities after proper documentation.
g. The ancillary and non-fund based business, should be shared by the member banks in the
same proportion in which, fund based limits are shared.
h. The inspection/verification of securities may be done by the Lead Bank or members in
rotation as per arrangement finalised at the consortium.
i. The quarterly operating statement will be submitted to the Lead Bank who will fix the
quarterly operative limits and communicate it to the member banks.
j. Normally the Lead Bank will have the authority from other member banks to make
available their share/enhanced limits, if latter's decision is not conveyed to the Lead Bank
in time. However, after first disbursement as above, the borrower will be allowed to
operate his accounts with member banks, subject to limits allotted to them. The Lead
Bank should ensure that the borrower does operate his accounts with all the member
banks proportionately.
1.11 Working Capital Facilities under Multiple Banking
i. Normally bank does not finance the working capital requirements of a borrower, who is
enjoying some working capital limits with other banks. The bank would like to take over
the account in total, rather than share the facilities without a formal consortium.
ii. The financing bank should obtain full details of the credit facilities availed of by such
borrowers from the banking system duly certified by their auditors, each time any fresh
facility/enhancement is sought. Financing banks should ensure the timely exchange of
information and co-ordinated approach in the interest of overall credit discipline.
iii. The documentation will be separate for each financing bank and charges should be
registered on assets to cover their exposure. In case of multiple banking arrangement
reporting under CMA is to be done by each bank separately.
iv. Quarterly operating statements should be submitted to all financing banks and operative
limits fixed separately by the individual banks. The individual banks will be free to fix their
rate of interest and other conditions.
v. Due to inherent risks involved and many operational problems in control monitoring and
follow-up of credit facilities, 'Multiple Banking' should not be encouraged and should be
avoided. Wherever possible a formal consortium should be formed.
1.12 Encouraging Bill Culture
A. General:
The RBI issued guidelines that in financing Post Sale activities of borrowers Book-Debt facilities
should be discouraged and wherever such facilities are granted it should be endeavored to convert
it into bills purchase/discount facilities.
To ensure better compliance, RBI advised that in respect of all borrowers enjoying fund based
working capital credit limits of Rs. 5/- crores and above. Bank should fix separate limits for
financing of inland credit sales within the overall permissible limit and also segregate the facility by
way of bills and book debts. This is required to be done even in case of consortium advances and
each member bank will fix segregated limits as above.
B. Drawee bill scheme
i. Background:
One of the major recommendations of the CHORE COMMITTEE was the progressive use of Bill
system of financing, both sales and purchases. The financing of receivables by way of Bills
Purchased/Discounting methods has been quite popular and has been widely resorted to by banks
and borrowers since long. However, finance of purchases through bill system can be considered by
way of a Drawee Bill System.
ii. Mechanics of the System:
The Drawee Bills System may operate in two ways:
a. Acceptance System.
b. Bills Discounting System.
a. Acceptance System:
Assume 'S' is the seller, 'B' is the buyer, 'SB' is the seller's bank and 'BB' is the buyer's bank,
i. Under this system 'S' draws a bill on 'B' (Buyer) which is accepted by 'BB' (buyer banker)
and given back to 'S'.
ii. 'S' can now discount the bill with his banker 'SB' and get prompt funds.
iii. On due date 'SB' will present the bill to 'BB' and get the payment. Alternatively 'BB' will
debit 'B' a/c with him and remit amount of the bill to 'SB' on due date.
iv. For 'BB' the goods represented by the bills can form the tangible security for the liability
arising out of the 'acceptance' on behalf of 'B'.
v. In some cases both 'SB' and 'BB' can be one bank.
vi. Under this system 'B' would give an authority to his banker 'BB' to accept bills drawn under
this scheme.
vii. Alternatively it is also possible for 'B' to have an arrangement by which 'S' draws bills on
'BB' directly as "BB - A/C B" upto a certain amount. In such a case, acceptance of each bill
by 'B' is not required. 'BB' will maintain a separate contingent liability record of such bills
accepted and the value of goods covered under the "Acceptance Bills" will be showed
separately to avoid "Double Financing".
viii. While computing Drawing power in Cash Credit A/c, the outstanding liability irrespective of
acceptance of bill will be earmarked and separated for payment of bills on due dates.
This earmarking can be done under two different methods as under: (Rupees Lacs)
(a) Limit Sanctioned against RM 200
(b) Assume 50% of limit earmarked for drawee bills. 100
(c) Amount available for drawing against Raw Material 100
Assume that there are no other limits and also no other Current Assets. In such a situation the
above limits might have been fixed on the basis of following situation :
Gross W/C (Current Assets) 400
Less Current Liability 100____
W/C Gap 300
Less 25% of Current Assets on NWC 100____
Permissible Bank Finance 200
The classification of stock will be as under:

Total Stock = 400
Stock paid for = 300
Unpaid Stock = 100
When the borrower submits a stock statement, effective stock for DP will be Rs. 300/- lacs.
Assuming a margin of 33-1/3%, Drawing Power will be 200 lacs. (Which is equal to the limit).
If drawee bill limit is carved out of above, this margin on stocks (33 1/3%) for drawing power, will
have to be increased as we see below.
METHOD I:
Assume 50% of limit i.e. Rs. 100/- lacs is granted by way of drawee bill limit and all bills amounting
to Rs. 100/- lacs are accepted by the bank. Drawing power will be calculated and earmarked as
under :
(Rupees lacs)
Stocks paid for 300
Stocks represented by drawee bills 100
Total stocks 400

Less 50% margin 200
Drawing power available 200
Less DP earmarked for drawee bills 100
Drawing power for Cash Credit 100
Now assume Cash Credit limit is fully drawn and liability under drawee bill is Rs. 100/- lacs. On due
date when the drawee bills are paid to the debit of Cash Credit A/c the entire stocks becomes fully
paid = Rs. 400/- lacs and drawing power will be Rs. 200/- lacs and Cash Credit balance will be Rs.
200/- lacs. Hence there is no irregularity.
METHOD II
DP will be calculated as under : (Rupees lacs)
Paid up stocks 300
DP at 50% 150
Assume that the bank has accepted the bills for Rs.100/- lacs represented by unpaid
stocks/creditors. When the bills are paid on due dates to the debit of Cash Credit A/c, the debit
balance in the a/c will be Rs. 250/- lacs against a DP of Rs. 200/- lacs (50% of 400). The
irregularity is Rs. 50/- lacs. This represents the DP against unpaid stocks earlier represented by
Drawee Bills. To regularise the a/c borrower will have to bring in Rs. 50/- lacs (margin money on
Drawee Bill).
ix. Comments:
Under Method I, if there had not been a drawee bill limit, the borrower will have a DP of Rs. 200/-
lacs against paid stocks of Rs. 300/- lacs with 33 1/3% margin. But because of drawee bill limit of
Rs. 100/- lacs, he is left with a DP of only Rs. 100/- lacs against the same stock. That is, he is
required to keep a margin of 66 2/3%. The borrower may not like this. He may argue that bank had
not accepted the bills, he would have got a credit for same amount. However, it can also be argued
that when the bills drawn on the borrower are accepted, it is done without any margin which
counter balance higher margin on paid stocks.
Moreover, banks acceptance enhances his goodwill with the creditor and increases his ability to get
a better price. The borrower has to pay his creditors after all from realisation of current assets or
from Cash Credit a/c. Under Method II, if the borrower is not able to regularise the a/c by bringing
in the margin of Rs. 50/- lacs at the time of payment of accepted bills, banker runs a risk of default.
As such the banker would obviously prefer the Method I.
x. Bill Discounting System :
Under this system 'BB' will discount the bills and pay off 'S' under an agreement between 'S', 'B' and
'BB'. The goods under the bill will be straightaway taken as security by the bank against "Bills
Discounted" outstanding in his books. The rate of interest on bills discounted under drawee bill
scheme is the same, as that for Cash Credit a/c subject to minimum lending rate. Fixation of limits
and calculation of DP, will be same as in "Acceptance System". Banks should earmark DP suitably
against available stock after providing the prescribed margin.
On due dates, Bills Discounted are adjusted to the debit of Cash Credit a/c and DP recalculated in
the same manner as in "Acceptance System". This system is heavily favouring the seller. While the
borrower is required to pay interest and discounting charges for the unexpired period of the credit
otherwise available to him free of cost from his creditors.
xi. Advantages of the Systems:
But for certain operational inconvenience and also some increase in the work load of the borrower’s
bank; both the systems have several advantages to the various parties.
Seller: Assured payment on due date. Benefits to SSI units who otherwise are forced to sell goods
on the long credit to medium/big industries and do not get paid on time. Since bill is accepted by a
banker, he gets a finer rate of discount.
Buyer: Since bill is accepted by his banker, gets competitive rates by way of higher discount will be
able to provide ready information about unpaid stocks. Improves ability to get additional Raw
Materials comparatively easily on the strength of his bankers acceptance.
Buyer's Bank: No risk as goods covered by such acceptance is charged to it as security. Ready
information about unpaid stocks is available.
Sellers Bank: Guaranteed payment on due dates by BB. By discounting, it gets ready funds
thereby improving cash flow.
1.13 Line of Credit to finance Current Assets
Line of credit system offers flexibility to clients to switch over between the various working capital
facilities sanctioned within relative case as per their needs compared to the prevalent system of
restricting the usage of funds within the maximum limits available within the facility only. This
system will essentially facilitate medium/large business units in efficient management of their
borrowing requirements within the sanctioned line of credit facility.
Under the line of credit ,instead of considering/sanctioning separate limits for cash credit (stock &
book debts) and DA LC facilities ,a combined limit for cash credit (stocks & book debts) –cum-DA LC
facilities ,a combined limit for Cash Credit (stocks & book debts) –cum-DA LC limit is to be
sanctioned with a sub limit for DA-LC facility.
The credit facilities / limits are reviewed by the competent authority subject to Conduct of the
account is satisfactory; and, There is no major adverse feature.
1.14 Post Sanction Control and Follow up of working capital facilities
i. After proper appraisal of the various Working Capital Facilities, the same should be conveyed
in writing to the borrower detailing the limits sanctioned, rate of
interest/exchange/commission, nature of securities and mode of charging the same to the
bank, detailed terms and conditions of sanction, details of service charges to be levied by
the bank etc. A copy of the same duly signed by the borrower in token of having accepted
the terms and conditions of sanction, should be obtained and kept on bank records.
ii. Many a time, it is observed that branches stipulate various terms and conditions in the
proposal forwarded to higher authorities which are included in the ultimate sanction. When
the sanction is conveyed to the borrower, he expresses his inability to accede to the
condition due to various reasons. Where after branches approach sanctioning authorities for
waiver/modification of certain conditions. Some of the examples of above are :
a. Stipulation of equitable mortgage of a property belonging to a guarantor or third
party without the consent of the guarantor or the third party.
b. Waiver of equitable mortgage as stipulated in the sanction as there is some defect in
the title of the property to be equitable mortgaged.
c. Change of guarantors as originally proposed.
d. Change of margin on various facilities.
e. Inter-changeability of various facilities.
f. Parking of sub-limits with other branches.
iii. To avoid such a situation, branches should discuss the proposal with the borrower/guarantor
in detail including the proposed terms and conditions. Only on obtaining their
approval/consent implicit/explicit should these conditions be stipulated. The idea is that
proposal is appraised keeping in view the proposed terms and conditions and any change in
the terms and conditions may alter the quality of the proposal to the detriment of the bank.
As such, any deletion of the terms and conditions once proposed due to technical problems,
should not be considered.
iv. The facilities sanctioned should not be disbursed without compliance of all terms and
conditions in full. Branches should resist from releasing the facilities/part of the facility on
obtaining an undertaking from the borrower to comply with the terms and conditions. In
cases where the higher authorities permit disbursing of the facilities without complying with
all the terms and conditions, additional interest @ 1 to 2% should be charged as per extant
norms.
v. Wherever required, the documents should be got verified by the Legal Manager attached to
the Zonal/Regional Office as per extant guidelines.
vi. In case of Cash Credit facilities, the borrower should be allowed to utilise the limit only after
submission of detailed stock statements showing the description of stocks quantity wise and
value wise. The statement should indicate the level of unpaid stocks also.
vii. Cash withdrawal of the limit sanctioned should not be allowed. The withdrawals should be
allowed by payment of cheques drawn by the borrower favouring suppliers etc. This is
necessary to ensure proper end use of funds.
viii. In the case of large drawals in the account of Rs. 50/- lacs and above, it should be ensured
that the amount is drawn for the purpose for which the credit has been sanctioned. For this
purpose, wherever necessary, the branches may call for information from the borrower,
regarding the purpose of such drawals.
ix. It is observed that some borrowers, particularly corporate entities, deploy funds by way of
investment outside their business, while at the same time, take recourse to institutional
credit facilities e.g. credit facilities from banks and other financial institutions. There may be
some specific compelling circumstances necessitating a borrower deploying its funds outside
business for a very short temporary period, subject to compliance of norms on financial
parameters.
However, such a feature should not continue for long and, more so, there should normally
be no increase of such investment from year to year when the borrowers are availing
working capital facilities from the bank. Hence, it would be necessary for branches to
examine this aspect while processing credit proposals and mention the amount so invested
outside business for the last three years (year- wise), clearly in the proposal. Also, it must
be specified when such funds would be brought back in the business. In case, there is an
increase in amount of such investment in a year, specific reasons for such increase are also
to be incorporated in the appraisal note.
x. For working capital facilities, both funded and non-funded, bank usually insists for second
charge on borrowers' fixed assets, if the fixed assets are already under first charge with any
term lending institution. It is often found that creation of such second charge takes a long
time pending obtaining requisite NOC from first charge-holders and also compliance of other
formalities. It is always necessary that wherever such a stipulation is incorporated in the
sanction, this must be complied with before disbursement of the facilities.
But if in a specific case, on any convincing reason, it is felt that creation of such second
charge would take time, because of a need for obtaining a formal NOC from first charge-
holders, as a special case, at least an undertaking to submit NOC by first charge-holder may
be obtained before borrower's request for disbursement of facility pending completion of
formalities for creation of second charge, is put up for consideration of the sanctioning
authority.
In other words, as NOC is usually required for creation of second charge on securities, if in
any situation, in the business interest of the bank, the sanctioned facilities are required to be
disbursed (after obtaining approval from the concerned sanctioning authority), the same
should be backed by at least an undertaking from the concerned first charge-holder that
soon after compliance of their internal formalities for providing the bank with a formal NOC
as required, they would take necessary steps to facilitate creation of second charge in favour
of the bank expeditiously.
xi. There are some instances, where borrowers are sanctioned Cash Credit against
hypothecation of stocks only as primary security, while its other current assets viz. Book-
debts remain unencumbered and are not stipulated as collateral security. It is suggested
that even when a borrower is sanctioned Cash Credit against hypothecation of stocks only
and no other facility is required, collateral security by way of hypothecation of book-debts
and charge on fixed assets, if available, may be stipulated.
xii. For fund based working capital facilities, hypothecation of stocks/book-debts is usually
stipulated as primary security. If the borrower is also sanctioned non-fund based working
capital facilities viz. LC, Guarantee etc., extension of charge on hypothecated stocks/book-
debts may also be necessary. This is particularly relevant in the case of LC for procurement
of raw material on Usance Bills. As per bank's extent guidelines, extension of charge on the
stocks and book debts is stipulated for covering non-fund based facilities such as
LCs/Guarantees etc.
xiii. Whenever old ABs are outstanding, no fresh LC (even when this is permitted under the
sanctioned limit) should normally be opened without ascertaining the specific reasons for the
existing AB outstanding and the timeframe by which the same will be adjusted and the
source thereof and also after taking into account the overall value, conduct and dealings of
the customer with the bank.
xiv. Current Ratio and Debt-Equity Ratio are to be computed in accordance with existing
guidelines and if such ratios are not as per above norms in any account in any year, specific
reasons for such deviation must be clearly mentioned in the proposal.
xv. The borrowers (who have not maintained Current Ratio, Debt- Equity Ratio as per norms),
must be persuaded to undertake to improve the ratios to the level of norms, within specific
time bound programme, indicating the source of funds to be mobilised by the borrowers to
improve such ratios. Actions initiated by the borrower to improve Current Ratio/Debt- Equity
Ratio must be clearly spelt out in the proposal.
xvi. Branch/Regional Office/Zonal Office may preferably diaries such cases of commitments by
the borrower to improve the ratios over a specific period of time and follow-up with them
regularly, so that their commitments are fulfilled and the above ratios as per norms are
maintained.
xvii. As per Bank's Loan Policy, branches should conduct, periodical inspection of stocks
hypothecated to them on a regular basis and Inspection reports submitted by concerned
officers within stipulated time. Such inspections are very vital for safeguarding bank's
interest and also ensure proper end use of funds. Further it helps in detecting any danger
signals regarding the deteriorating quality of assets, non-movement of stocks, cessation of
production etc.
xviii. Any irregularity pointed out should be immediately rectified by giving a suitable written
notice to the borrower. If the irregularity persists, branch may consider recalling the a/c.
xix. In respect of Cash Credit (Hypo of Book Debts) branches should obtain the certified
statement of book debts and calculate advance value as per terms and conditions of
sanction. It should be ensured that debts for which bills are purchased are not included in
the list. Similarly doubtful debts are excluded. Branches should insist for book debt
statement every month and certified by Chartered Accountant at least once in three months.
xx. Borrowers investment in shares, debentures UTI, Mutual Funds etc. are not to be taken into
account for computing MPBF. Also no adjustment is to be made for such investment in the
projected net Working Capital. This should be ensured even at the time of fixing up of
operative limits under QIS.
xxi. Borrowers coming within the ambit of second method of lending have to maintain minimum
level of current ratio of 1.33 and that slip back in current ratio even when minimum level of
1.33 is maintained should not be permitted except for specific permissible purposes, such as
diversification etc. as already explained.
xxii. Branches are required to charge penal interest, minimum upto 2% on the amount, if any,
diverted from working capital finance granted to the borrower for investment in Inter
Corporate Deposits (ICD), associate concerns, real estate investment, investments in share
and advance to other firms, companies not connected with the business of the firm. If any
such amount has been diverted branches should recall the same.
xxiii. In case the borrower fails to repay the amount drawn from Cash Credit account and utilises
for the purposes as above, branches are to reduce the limit to the extent of amount so
diverted.
xxiv. Branches should address a letter to all borrowers with Working Capital funds based limit of
Rs. 1 crores and above from the banking system regarding commitment charges for non/
under utilisation of sanctioned limits.
xxv. No ad-hoc facility should be granted to borrowers, who have been sanctioned credit facilities
recently.
xxvi. Ad-hoc facilities should not be considered to borrowers, whose credit facilities are not
renewed since long.
xxvii. Powers for granting of ad-hoc limits should be sparingly used only to meet genuine
emergent short term requirements of the borrowers.
xxviii. Similarly frequent excesses in the account beyond sanctioned limit/advance value should not
be granted. Branches are expected to use their powers to grant excesses in a judicious
manner, so as to avoid instances of circumvention of the delegated powers. If such excesses
are allowed, it should be ensured that proper reporting of excesses allowed is done and
confirmation is obtained immediately within the prescribed period, from appropriate
authority.
1.15 Guidelines for granting NOC to Corporates in availing Corporate Loans from other
banks.
i. Where our Bank is already a term lender and we are having 1 st pari-passu charge on fixed
assets, it is a general practice to stipulate that the borrower shall maintain fixed asset cover of
at least 1.25 during the entire currency of the loan. Hence, if this condition is not diluted i.e.
the asset cover does not fall below 1.25 even after reckoning the proposed Corporate Loan,
then issuance of NOC may be considered.
ii. Where we are working capital banker having 2nd charge on the fixed assets as collateral, then
the following conditions maybe considered:
a. Where the collateral asset cover is in excess of 1.00, NOC may be considered provided the
availment of corporate loan will not cause the asset cover to fall below 1.00
b. If the collateral asset cover is already below 1.00, NOC may be considered provided the
reduction in the asset cover consequent upon availment of the proposed corporate loan
does not get reduced by more than 10% on case of ‘B’ and ‘B’+ rated accounts, and
15%in case of accounts rated ‘A+’ and ‘A’.
iii. Since the corporate loan is meant for improving the current ratio, it should be reasonably
satisfied upon from the company’s projections that current ratio will reach the minimum
benchmark levels.
iv. Availment of the corporate loan does not significantly impact the debt equity ratio of the
company.
v. Additional current assets out of corporate loan shall be charged to the working capital lenders
and the bank giving the corporate loan should not insist for 1 st charge on the current assets
also, notwithstanding the fact that the corporate loan might have been given for creation of
such assets.
vi. Authority for issuing No Objection Certificate
a. In case of accounts falling under the powers upto General Manager, the NOC may be
given by the authorities under whose powers the concerned account falls.
b. Accounts falling under the powers of functional head at Corporate Centre, the functional
head shall take suitable decision.
c. For all other cases, Chairman & Managing Director/Executive Director.
d. All decisions of authority upto the level of General Manager having issued the NOC are to
be reported to the next higher authority within 7 days from the date of the decision.
Test your Learning-
1] What is Net Working Capital?

a) Total C.A. minus Total C.L.
b) Total C.A. minus Total C.L. (excluding bank borrowing)
c) Total C.A. divided by Total C.L.
d) Total current assets
2] How much own minimum margin is required to bring Under 1 st method of lending?
a) 5% of estimated sales
b) 25% of working capital gap
c) 25% of total current assets
d) 25% of core current assets
3] How much own minimum margin is required to bring Under 2nd method of lending?
a) 5% of estimated sales
b) 25% of working capital gap
c) 25% of total current assets
d) 25% of core current assets
4] PBF system is applicable to which type of borrower?

a) Ship breaking companies
b) Diamond Industry
c) Software companies
d) All are applicable
5] For what purpose, we can grant working capital term loan?

a) Purchase of fixed assets
b) Repayment of Term Loan
c) To meet with shortfall in NWC
d) For purchase of current assets
6] What are the guidelines for working capital limit for SME Borrower under Regulatory
Segment?
a) Turnover method only
b) First Method of lending only
c) Turnover method or first method of lending, whichever is higher
d) Second method of lending
7] Select which is relevant to Current Ratio?

a) It indicates promoter’s margin in working capital limit
b) It indicates Promoter’s margin in term loan limit
c) It indicates the solvency of the firm
d) Both B & C
8] Select which is relevant to Debt equity ratio ?
a) It indicates no. of times external borrowing in comparison to net own fund
b) It indicates no. of times external borrowing in comparison to capital only
c) It indicates no. of times external borrowing in comparison to current liabilities
d) It indicates liquidity position of the firm
9] Which is relevant to Packing Credit limit?

a) Pre-sale limit
b) Post-sale limit
c) It is granted for packing of finished goods
d) It covers both A and B
10] Which is not appropriate of post sale limit?

a) Cash Credit (Book debt)
b) Cash Credit (Stock)
c) Bills discounting
d) FBP / FBD
e) All of the above
11]. Turnover method involves assessing WC upto 5 cr for non digital mode requirement at :-
a) 25% of acceptable projected gross sales
b) 30% of acceptable projected gross sales
c) 5% of acceptable projected gross sales
d) 18.75% of acceptable projected gross sales
12].Under the First method of lending CR for micro unit should not be less than :-
a) 1.33
b) 1.17
c) 1.50
d) 1.25
e) 1.20
13].Inspection of securities to be done periodically :-

a) As specified in the domestic loan policy
b) Once in a year
c) Whenever time permits
d) Whenever need arises
e) Bimontly
14] If WC credit facilities are found to be used by the borrower for long term uses of funds then
it is called a case of :-
a) Siphoning of funds
b) Diversion of funds
c) Both a & b
d) Kite Flying of funds
e) None
15].If CR (for wholesale clients) is below 1.33 it cannot be accepted for assessment under any
circumstances whatsoever.
a)True
b) False
c) Depends
d) None
e) Proposal should be regretted
16. NWC reflects:-

a) Only promoters margin in the business
b) Long term funding of working capital requirement
c) Both
d) None
e) Unsecured loan from friends & relatives
17. Which one of the following is not a component of gross working capital?
a) Inventories
b) Receivables
c) Cash & Bank balance
d) Plant and Machineries
18. Total current assets is also known as

a) Promoter’s margin
b) Net Working capital
c) Gross working capital
d) Working capital gap
19. Working capital gap is equal to

a) Total current assets
b) Total Working capital-promoter’s margin
c) Total current assets-total current liabilities
d) Total current assets- total current liabilities excl. Bank borrowing
20. A manufacturing unit has approached to a branch for sanction of working capital limit. They
have submitted the following projections. Answer the given below questions based on the
following projections (Rs.in lacs)
Current Liabilities Amt Current Assets Amt

Creditors for purchases 100 Raw materials 200
Other current liabilities 50 Stock-in-process 20
Bank borrowings 200 Finished goods 90
Receivables 50
Other current assets 10
Total Current Liabilities 350 Total Current Asset 370
What would be the Maximum Permissible Bank Finance as per 1 st Method of Lending?
a. Rs. 200 lacs
b. Rs. 220 lacs
c. Rs. 165 lacs
d. Rs. 128 lacs
1 2 3 4 5 6 7 8 9 10
A B C E C C A A A B
11 12 13 14 15 16 17 18 19 20
B B A B B B D C D C
Source/Reference
 Book of Instruction-2012, Volume on Credit Management, Chapter on Working Capital
Finance.
 Domestic Loan Policy -2014.
10. NON FUND BASED CREDIT FACILITIES
Quick Bites:
 Bank Guarantees: Types of BGs, Assessment of Limits, Issuance of BG,
Invocation and cancellation of BGs
 Co-acceptance of Bills & DPG
 Letter of Credit: Type of LCs, Import / Inland, DP/DA, Assessment of Limits
Banks total credit portfolio is classified into two broad categories viz. Fund Based and Non Fund-
Based. While Fund Based Advances constitute the On-Balance Sheet items, the Non-Fund Based
Advances comprise of the Off-Balance Sheet exposure.
Non Fund based limits are the facilities extended by banks to the clients without flow of funds. The
major non-fund based facilities that are considered as a part of the regular credit facilities are:
A. Bank Guarantee
B. Co-acceptance of Bills
C. Letter of Credit
 BANK GUARANTEE
A Contract of Guarantee under the Indian Contract Act is defined as “a contract to perform the
promise or discharge the liability of a third person in case of his default .”
There are three parties involved in a contract of guarantees:

a. The Applicant – On whose behalf guarantee has been issued (i.e. the principal debtor)
b. The Beneficiary – To whom the guarantee is issued
c. The Guarantor – in case of Bank Guarantee (BG) it is the Issuing Bank (i.e. the surety)
Depending upon the nature of guarantee issued, BGs can be divided into two main
categories:
a. Financial Bank Guarantee
b. Performance Bank Guarantee
However it may be noted that the role of the issuing bank is restricted to compensate the
beneficiary in monetary terms only.
As per Off Balance Sheet Policy BCC:BR:106/443 dated 14.11.14 and RBI Master Circular on
Prudential Guidelines on Capital Adequacy and Market Discipline-New Capital Adequacy Framework
(NCAF) dated July 1, 2015 Bank guarantees have been classified as under:
Financial Guarantee (FBG) Performance Guarantee (PBG)
Financial guarantees are direct credit Performance guarantees are essentially transaction-
substitutes wherein a bank irrevocably related contingencies that involve an irrevocable
undertakes to guarantee the repayment of a undertaking to pay a third party in the event the
contractual financial obligation. counterparty fails to fulfil or perform a contractual
non-financial obligation
Financial guarantees essentially carry the
same credit risk as a direct extension of e.g.
credit i.e., the risk of loss is directly linked to
the creditworthiness of the counterparty (i) Bid bonds;
against whom a potential claim is acquired (ii) Performance bonds and export performance
guarantees;
e.g. (iii)Guarantees in lieu of security deposits /
earnest money deposits (EMD) for participating in
i. Guarantees for credit facilities; tenders; Mobilisation of advance ( Advance Payment
ii. Guarantees in lieu of repayment of Guarantee )
financial securities; (iv)Retention money guarantees;
iii. Guarantees in lieu of margin requirements (v)Warranties, indemnities and standby letters of
of exchanges; credit related to particular transaction.
iv. Guarantees for mobilisation
advance, advance money before the
commencement of a project and for money
to be received in various stages of project
implementation;
v. Guarantees towards revenue dues,
taxes, duties, levies etc. in favour of
Tax/ Customs / Port / Excise
Authorities and for disputed liabilities
for litigation pending at courts;
vi. Credit Enhancements;
vii. Liquidity facilities for securitisation
transactions;
viii. Acceptances (including endorsements
with the character of acceptance);
ix. Deferred payment guarantees (DPG)
which is a financial guarantee, is a way of
raising long term resources for acquiring
fixed assets/capital goods by securing
guarantee of repayment of principal and
interest from his banker to the supplier of
capital goods for suppliers credit.
Appraisal &Assessment of Bank Guarantee Limit / Amount 1:

At the time of issuing / assessing financial guarantees / Limits it should be satisfied that the
customer would be in a position to reimburse the bank in case the bank is required to make
payment under the guarantee.
1
RBI has advised that the banks should refrain from issuing guarantees on behalf of customers who
do not enjoy credit facilities with them. In an exceptional cases when such guarantee facility is to
be considered for constituents who do not enjoy regular credit facilities with us a proper justification
is to be recorded.
In the case of performance guarantee, due caution is to be exercised and it should be satisfied
upon that the customer has the necessary experience, capacity and means to perform the
obligations under the contract, and is not likely to commit any default.
In the case of One-time requirement of issuance of Bank Guarantee / ad-hoc BG

issuance, the appraisal is done on a case-to-case basis and looking to the immediate requirement
of the borrower. No guarantee to be issued on behalf of constituents enjoying main credit facility
with other banks without the prior consent of the latter
Broadly the following should be assessed before issuance of BG / BG issuance on adhoc basis.
a. Purpose: Should be incidental to business of the constituent and same should be in

consonance with the memorandum of Association / Partnership Deed.
b. Period: Normally Bank guarantee with maturity of more than -5- years should not be issued.
Any guarantee beyond -5- years can be issued with prior approval of next Higher Authority
c. Amount: Guarantees in respect of disputed duty/taxes and disputed litigations like
in family disputes, compensation money etc. should be secured by 100% cash margin
without exception. One-time BG / issuance of BG on adhoc basis may be issued subject to
DLP.
d. Security: Besides cash margin, every effort should be made to get adequate security by
way of charge on borrower's fixed/current assets and/or immovable properties of
proprietor/partners/directors/ guarantors and/or third party guarantee/ECGC guarantees etc.
The subsisting charge on the available primary security/ collateral security available to the
bank in respect of other credit facilities should be extended to cover bank guarantee facility
also
If the BG requirement is on continuous basis then, in addition to the above, the following needs
to be assessed:
a. Outstanding BGs
b. Cancellation envisaged / BG getting expired in the next 12 months
c. Requirement incidental to regular operations:
i. The business and Tendering cycle should be analyzed and the various types of BGs
required in the in the line of activity.
ii. Volume of Activity. E.g. projected value of Tenders in which the customer intends to
participate along with success rate.
iii. Percentage of transactions where BG is required. E.g. Average Bid Bond (in lieu of EMD)
required while tendering for a contract for say a Public Works Department may be @
10% of the bid amount.
iv. Frequency of Issue and Average time Period of BGs to be issued
d. Requirement pertaining to contingent events
e. Guarantees which are likely to be required on a fixed basis and will be outstanding as long
as the unit is in operation or the bank finance is outstanding e.g. guarantee in favour of
State Electricity Boards in lieu of security deposit/for regular payment of Electricity Bills etc.
The requirement can be assessed as under:

Sr.No. Particulars Amount
A Outstanding BGs
B Cancellation envisaged
C Requirement incidental to regular operations
D Requirement pertaining to contingent events
E Guarantees which are likely to be required on a fixed basis
F Requirement of BG = {(A-B)+C+D}
If any foreign exchange element is envisaged in the PBG, in absence of natural hedge, suitable
condition for bearing forex risk by the borrower to protect from exchange fluctuation risk , should
be stipulated in the sanction.
Review of Bank Guarantee Facilities

1. The Bank Guarantee limits once sanctioned should be reviewed every year along with all
other fund based and non-fund based limits. At that time, the following should also be
analysed and incorporated while reviewing the BG facilties:
i. level of utilisation of the limits
ii. Instances of BG invocation
2. Performance Bank Guarantees (PBG) involving projects of Rs 50 crs and above should be
monitored / reviewed with respect to the envisaged milestones vis-a-vis the progress made
on quarterly basis. Project specific progress reports at quarterly intervals should be obtained
from the company
3. Further if the PBG is extended for a specific project viz. Road / Power, Branches should
appoint LIE (Lenders’ Independent Engineer) to obtain the quarterly report, inter alia,
commenting on the quality, status, timeline of the project execution which ensures about
the milestones achieved, and quality of work done by the constituent for monitoring
purposes. The report of LIE should be analyzed in corrective action if necessary should be
initiated.
4. While reviewing the PBG facility (above Rs50.00crs) a special mention should be made in
respect of status of the projects with regard to mile stones achieved under PBG, including
project wise Risk Analysis.
5. In case of non achievement of milestones in physical progress, the actions under Event of
Default (EOD) should be triggered for corrective measures.
Issue of Bank Guarantee

1. It should be understood that the sanctioning of a Bank Guarantee limit does not
automatically mean that the borrower has the right to get any type of Bank Guarantees
issued. Every guarantee to be issued within the limit should be need based, justifiable from
the business point of view and within the purview of guidelines of RBI and the bank issued
from time to time.
2. No guarantee should be issued for unlimited amount and/or for unlimited period.
3. Guarantees should be generally issued only as per standard format If for any special
reason or circumstances, deviation from the standard format is warranted, the draft
form of the guarantee should be approved by Regional Authority/legal deptt, before
execution, even if the issuance of the guarantee falls within the discretionary powers of the
Branch Manager
4. Bank's usual limitation clause, as under, should be included in all the guarantees, if it is
requested by the beneficiary.
5. Notwithstanding any thing to the contrary contained herein :-

i. Our liability under this Bank Guarantee shall not exceed Rs.______(Rupees _______only),
ii. This Bank Guarantee shall be valid upto ____________ and,
iii. We are liable to pay the guarantee amount or any part thereof under this Bank Guarantee
only and only if you serve upon us a ____written claim or demand on or before ____ ( the
date of expiry of Guarantee).
6. Guarantees with 'Assignment' clause are not to be issued at all.
7. Guarantees should not cover any clause, which undertakes automatic renewal of the
guarantees.
8. The guarantee format should not contain any onerous clauses
9. Guarantees in respect of disputed duty/taxes should be secured by 100% cash margin,

particularly in all cases where the party has preferred an appeal against the judgement of a
court or tribunal. In respect of the disputed amounts in litigation like in family disputes,
compensation money etc. the guarantee should be backed by 100% cash margin without
exception.
10. While extending guarantee against export advances it is to be ensured that no violation of
FEMA Regulations takes place and bank is not exposed to various risks. It will be important
to carry out due diligence and verify the track record of exporters to assess their ability to
execute export orders.
11. Guarantees to be issued in favour of overseas buyers should be only on account of bonafide
export from India, observing laid down norms of the customer and his capacity.
12. Guarantees should not be issued in respect of caution-listed exporters without prior approval
of Reserve Bank of India.
13. Documentation as per bank guidelines including, inter alia, Counter indemnity should be
obtained before issue of BG
14. Guarantee deed should be signed by the officers holding appropriate and valid power of
attorneys
15. When bank guarantee is issued for procurement of raw material on credit, care should be
taken to ensure that no finance is allowed against such stocks. The branches should treat
the material received under such bank guarantee as unpaid stock accordingly reduce the
material while calculating drawing power.
16. As per BCC:BR:107:375 dated 05.08.15 all domestic guarantees are to be continued to be
issued in paper form (i.e. on usual stamp paper as per Stamp Duty applicable in respective
States) to the beneficiary. Simultaneously an advice/ confirmation towards issuance of BG
has to be sent by the issuing bank/branch to the advising bank through SFMS. The BG shall
become operative at beneficiaries’ hands only if accompanied with such separate advice/
confirmation issued by issuing bank/branch through SFMS and received by the beneficiary
through his bank (i.e. advising bank). Please also refer BCC:BR:109:263 dated 23.05.2017.
17. Feeding of ‘Limit Node’ is mandatory while opening/issuing BG in finacle.
18. Bank has published many circulars regarding Bank Guarantees issued in favour of President
Of India. Please refer to recent launched circular BCC:BR:110:102 dated 23.02.2018.
Invocation of Bank Guarantee

1. Where a guarantee is invoked, no attempt to delay the payment or facilitate party to bring
injunction restraining the payment be made. However, the branches should satisfy
themselves that the guarantee has been invoked properly and as per the terms specified
therein.
2. Guidelines as per BCC:BR:107:429 dated 03.09.15 with respect to Change in accounting of

Invocation of Bank Guarantees/SBLC (for procurement of Raw Material/ Stock) are to be
complied with
Cancellation of Bank Guarantee
A guarantee can be cancelled only in following two instances : (a) Prior to expiry period with the
consent of all the parties to the contract, and (b) On expiry of the claim period.
Referring to recent RBI guidelines our bank has published the circular BCC:CIC:DFB:110/6
regarding discontinuance of issuance of LoUs/LoCs for trade credits for imports into India with
immediate effect.
 CO-ACCEPTANCE OF BILLS & DPG
Deferred Payment Guarantee

A DPG is essentially a guarantee in favour of a supplier of Fixed Assets, usually Plant & Machinery,
to a buyer on Deferred Payment basis, for payment of installment on the due date if the buyer fails
to pay the same. As such DPG is a substitute for a Term Loan. As such for the purpose of
Discretionary Lending Powers(DLP), a DPG is treated as a Fund Based Facility.
Co-acceptance of Bills
When a borrower intends purchasing of goods and machineries on deferred credit basis, the seller
usually requires the buyer to provide a Deferred Payment Guarantee from his bankers or get the
usance Bills of Exchange, drawn by the seller for the deferred sale, co-accepted by the buyer's
bank. This will give the seller an assurance of payment by the buyer on the due date and in case of
such a default, the co-accepting bank would make the payment.
Such proposals, therefore, should be subjected to thorough scrutiny and appraisal as in the case of
any proposal for bank Guarantee of Letter of Credit Facilities.
The accounting entries and rates of commission in respect of co-acceptance facilities are the same
as applicable for Bank Guarantees.
Co-acceptance of bills covering supply of goods
 Proposals for co-acceptance should be examined thoroughly and the need thereof should be
well established. Such facilities should be only to those who enjoy other credit facilities with
the Bank.
 Since this facility enables the party to avail/enjoy credit facility from the suppliers, the
same should be considered as a part of working capital and hence the fundbased
working capital facilities should be correspondingly reduced.
 Only genuine trade bill should be co-accepted.
 The goods covered by such bills should be hypothecated to the Bank, but no advance should
be granted against these goods as to avoid double financing. This is generally done by
earmarking in market/advance value of stocks (as the case may be) and the limit, if the co-
acceptance facility is not taken into account while assessing the credit limit. Periodical
inspection of the stocks should be done.
 It is to be ensured that adequate arrangement is made by the parties out of their own
resources or through existing borrowing arrangements to honour the bills on due dates. For
this purpose, the party's cash generation should be examined.
 Valuation of goods covered under the bills should be verified to ensure that there is no
hidden accommodation or this credit of the suppliers of goods is not exorbitantly high.
 No house bill, i.e., bills drawn by sister/associated concerns be co-accepted without specific
sanction of higher authorities.
 Bills should be co-accepted within the sanctioned limit only. No officer without proper Power
of Attorney should co-accept bills.
 Proper records of all bills co-accepted should be maintained and due liability entries should
be passed in the books of the branch.
 Due date of the bills co-accepted should be diarised and action in advance should be
initiated to ensure that the bill is honoured on due date by the party.
 Periodical returns as laid down relating to the bills co- accepted should be submitted to the
controlling authority.
 Co-acceptance facility is treated as a fund based facility for the purpose of exercising
Discretionary Lending Powers.
Co-acceptance of bills covering supply of machinery under deferred payment guarantee
arrangement
 This facility covers acquisition of capital equipment on long-term credit with provision for
payment of installments in a deferred manner. Such proposals should be processed in the
same manner as the proposals relating to Term Loan. Particularly care should be exercised
for evaluating the additional benefits/viability of the project and the cash flow during the
deferred period of credit to ensure that the customer will be able to make periodical
payment of the bill on due date.
 In addition to taking the machinery purchased under D.P. financial guarantee,

extension/charge on other fixed assets should also be taken as security for the facility,
wherever applicable.
 No co-acceptance of bills with short usance period (say 90/180 days) covering supply of
capital goods/machineries/ equipment should be considered, particularly for a new project,
as our experience shows that the parties are seldom able to generate adequate funds within
such short duration for retiring the bills on due dates.
Discounting/purchase of bills co-accepted by other banks (other than IDBI schemes)

Before discounting/purchasing bills co-accepted by other banks for the value exceeding Rs. 25,000/-
for a single party, branches should obtain written confirmation of the Regional/Zonal authority of
the co-accepting bank. Similarly, when the total amount of such bills discounted/purchased exceeds
Rs. 10/- lacs for a single borrower, prior approval of the Head Office of the co-accepting bank must
be obtained in writing and kept on record.
Reference:
1. RBI Master Circular on Bank guarantees and Co-Acceptances dated 01.07.15
2. BCC:BR: 106:443 dated 14.11.14 (Off-Balance Sheet Policy)
3. Book of Instruction 2012
4. Bcc:br:109:263 dated 23.05.2017
5. BCC:BR:109:13 dated 05.01.2017
6. BCC:BR:109:600 dated 15.11.2017
 LETTER OF CREDIT
Ideally any seller of goods/services would like to receive payment before the delivery of
goods/services to a buyer. Similarly the buyer would also like to ensure that the goods/services
bought are as per his specifications and deliveries are effected in time, before parting with the
money. If the buyer and seller are at two different, far away stations, both the factors can not be
satisfied simultaneously.
As a compromise, services of third party as an intermediary are utilised. This intermediary is usually
a bank who issues a letter of assurance to a seller at the request of a buyer for payment of cost of
goods / services sold on certain terms and conditions. Such an assurance letter is named as a
"Letter of Credit".
A letter of credit is a written instrument issued by a banker at the request of a buyer (applicant) in
favour of the seller (beneficiary) undertaking to honour the documents or drafts drawn by the seller
in accordance with the terms and conditions specified in the credit, within a specified time.
Different parties to a Letter of Credit
Applicant The buyer of the goods/services (borrower)

Opening Bank The Bank/Branch which issues the LC
Advising Bank Opening bank's branch or another bank at beneficiary's place to
whom the Letter of Credit is sent for onward transmission to the
beneficiary
Beneficiary The party to whom the credit is addressed (seller or supplier of the
goods/services)
Confirming Bank The bank adding confirmation to the letter of credit, which undertakes
the responsibility of payment by the issuing bank and on his failure to
pay
Negotiating Bank Opening bank's branch or another bank who negotiates the
documents
Reimbursing The bank who make the payment of document on behalf of the
Bank opening bank to the negotiating bank
Different Types of Letter of Credit
(a) Inland L/C : An L/C where all the parties to an L/C are located within the country.
(b) Foreign L/C : An L/C where either the opener or the beneficiary is located outside the
country of issue and arising out of export or import of goods/services out of/into the country
of issue.
(c) Revocable : A credit that can be cancelled or amended at any time without the prior
knowledge of the beneficiary. This was in vogue till UCPDC 500 and has been withdrawn in
the latest version
(d) Irrevocable : When a LC is issued it is deemed to be an irrevocable LC. It is a definite
undertaking of the issuing bank to honour documents strictly drawn as per terms and
conditions of credit which cannot be amended or cancelled without the agreement of all the
parties to the credit, in particular the beneficiary.
(e) Confirmed : Where credits carry the confirmation of the advising bank. It constitutes a
definite undertaking of such confirming bank in addition to that of the opening bank.
(f) Transferable : A transferable credit is a credit under which the beneficiary (first
beneficiary) may request the bank authorised to pay, incur a deferred payment undertaking,
accept or negotiate (the "Transferring Bank"), or in the case of a freely negotiable credit,
the bank specifically authorised in the credit as transferring bank, to make the credit
available in whole or in part to beneficiary(ies) second beneficiary/beneficiaries
(g) Acceptance : If a beneficiary decides to grant a period of credit to the importer after sight
(date of sighting the docs) the LC stipulating such a condition would be termed as an
Acceptance Credit and the period of credit is known as Usance. Here the payment is to be
made on the maturity date calculated on/after in terms of the credit.
(h) Revolving : Which provide that the amount of drawings made thereunder would be
reinstated and made available to the beneficiary again and again for further drawings during
the currency of credit, upto a certain sum subject to certain conditions specified therein.
(i) Standy Letter of Credit : 'Stand - by Letters of Credit', are usually issued by banks where
the local laws do not permit issue of guarantees. Thus, stand-by letters of credit are
substitute for the guarantees. Generally, such letters of credit are resorted to guarantee the
payment in the event of failure of the opener to perform the contracted obligation/pay the
indebtedness undertaken. Accordingly, under the 'standby letter of credit' there may be or
may not be a transaction in sale of goods. So we may term the words “opener” and
“beneficiary” of credit, instead of “buyer” and “seller”.
Documents under LC
Usual list of documents are:
Transport Bill of Lading, Airway bill, Lorry / Railway receipts
Documents
Insurance Usually covers fire, shipwreck, pilferage. Loss on account of war
Bill of Exchange Establishes the liability of the various parties involved in the credit
process
Commercial Invoice
Certificate of Origin Usually Issued by Chamber of Commerce / Export Promotion Council
etc
Packing List
Inspection / Quality By say ‘Llyod’ Surveyors
Certificate
Assessment of LC Limit
For assessing the Letter of Credit limit requirements of a borrower followings points are to be
considered:
1. The necessity for opening L/C: The necessity may arise due to the fact that a particular
raw material or a fixed asset or consumable stores are to be imported and the overseas
seller is willing to sell only against L/C. In case of inland sales also the seller may be willing
to sell the goods against L/C only. The same may be verified by the original terms of sale
offered by the seller.
2. The quantity of goods to be purchased under L/C: Once the necessity is established
the requirement of L/C limit would depend on the quantity of goods required for productions
annually that are to be purchased against L/C. Now we have to compute the monthly
consumption of material under LC
Annual Consumption of the material under LC A
Monthly Consumption of material under LC A/12 = M
3. Computing the Purchase cycle of the business unit: LC limit should be sufficient to
fufil the purchase cycle which is as under
Lead time from opening of LC / placement of order to B (months)
shipment
Transit period for goods till it arrives at the factory C (Months)
Credit (Usance) period available D (Months)
Total Purchase Cycle P = B+C+D
If the usance period starts from the date of shipment, transit period C in the above table will be NIL
4. Computing the LC Limit:
LC limit = P * M

 If the minimum order quantity for the item is more than the limit computed above the LC
limit may be required to raised accordingly
 It may be necessary to compute the peak and slack levels separately for seasonal industries
Example:
Assume a borrower purchases raw material worth Rs. 48/- lacs in a year.
Out of the above Rs. 24/- lacs worth of raw material are purchased through L/C.
Further out of this Rs. 24/- lacs worth of raw material purchased through L/C, Rs. 12/- lacs worth of
raw materials are imported.
The indigenous raw material purchased through L/C takes about 2 months to be delivered after
opening of L/C and in the case of imported ones it takes about 4 months and the minimum import
consignment is Rs. 3/- lac.
In the above case the monthly consumption of indigenous raw material is Rs. 12/12 - Rs. 1/- lac.
The monthly consumption of imported raw material is Rs. 12/12 = 1/- lac.
The amount of the limit for indigenous raw material will be computed as under:
Monthly consumption*(Lead Time + A weeks cushion) = 1*(2+0.25 months)= Rs. 2.25 lacs
The amount of LC limit for imported raw material will be
Monthly consumption X (Lead time + A month's cushion) = 1 X (4 + 1) = Rs. 5/- lacs.
The total L/C limit would then be Rs. 2.25 + 5.00 = Rs. 7.25 lacs say Rs. 8/- lacs.
Assessment of DA-LC limits

If in the above example both the L/C's are to be on 2 months DA basis then 2 months should be
added to the Lead Time subject to adjustment of transit period already covered under the Lead
Time. Assuming such transit period is 15 days or 1/2 month then the requirement will be
Indigenous = 1 x (2 + 0.25 + 1.5) =3.75 lacs
Imported = 1 X (4 + 1 + 1.5) = 6.50 lacs
---------
10.25 lacs Say Rs. 10/- lac
Adjustment of duty paid on imported raw material

While assessing the import LC limit the value of imported raw material annually obtained from the
balance sheet includes the import duty paid and transportation charges. However, the LC limit is to
be assessed on the basis of the C.I.F value of the imported raw materials. As such from the value
obtained from the balance sheet customs duty paid should be subtracted.
Example: A company engaged in manufacture of pharmaceutical products has projected total
imported raw material and consumable spares consumption as under:
Total Imported raw material consumption Rs. 9,000/-
Total Imported raw material purchase Rs. 9,900/-
Total Import of consumable stores Rs. 200/-
-----------
Total Purchase Rs. 10,100/-
------------
The company has further informed that the total imported goods as above will be utilised as under:
a. Rs. 4,500/- lacs worth of raw materials will be imported for manufacturing of goods to be
exported through a division which is 100% EOU which shall be duty free.
b. Remaining will be used for their own manufacturing which will attract 100% customs duty.
So out of the total raw material import of Rs. 10,100/- lacs Rs. 4,500/- lacs worth of raw material is
duty free.
Therefore, Rs.10,100 - Rs.4,500 = Rs. 5,600 lacs worth of raw material attracts 100% customs
duty.
In that case the CIF value of such goods would be approximate Rs. 2,800/- lacs.
Therefore, the total C.F value of goods imported will be Rs.4,500 + Rs.2,800 lacs = Rs.7,300 lacs.
Monthly requirements will be (Rs. 7,300)/12 = Rs. 610 lacs (Approximately)
Considering a Lead time of 2 months and assuming that average holding level of 2 months the limit
requirement will be 7300 X 2 X 2/12 = Rs. 2433 lacs, say Rs. 2500 lacs.
If the same is imported under 2 months DA L/C the limit would go up proportionately.
Guidelines of Inland LC
1. Letters of Credit limits are sanctioned as part of working capital package. So the availability of
funds at the time of retirement of bills drawn under LC be ensured. Therefore, analysis of the cash
flow pattern of the customer to ensure that sufficient funds are available to meet the liability when
payment under the credit falls due be conducted. Therefore along with the LC application ,copy of
the confirmed purchase order,proforma invoice and cash flow statement to be obtained.
2. It needs to be ensured that no double finance is made on the stocks received under the Letters
of Credit. The value of stocks under LC should be separately shown by way of footnote, and these
stocks should be excluded for the purpose of calculating advance Value/drawing power.
3.Further Letters of credit may be opened for procurement of capital goods, in which case the
requirement must be considered in line with the assessments made for funding such procurement.
Sanction should specify that the LCs can be opened for capital goods or raw materials as the case
may be.
4.Branches are to issue LCs through Structured Financial Messaging System (SFMS) only.(as per
RBI Guidelines)
5. Inland letter of credit transactions are guided by UCPDC ICC 600 guidelines ,guidelines
incorporated in Book of Instruction/circulars issued from time to time .
Guidelines On Import (foreign) Letter of credit:
The Opening of Import L/C involves compliance of — i. Foreign Trade Policy ii. Exchange control
requirement iii. Credit norms prescribed by RBI iv. Banks internal procedures v. UCPDC latest
revision , ICC publication 600 (UCP) and also fall within the scope of FEDAI guidelines.
Guidelines for SBLC
RBI has permitted AD Category- I Banks, to allow exporters having a minimum of three years’
satisfactory track record to receive long term export advance up to a maximum tenor of 10 years to
be utilized for execution of long term supply contracts for export of goods while issuing any bank
guarantee (BG) / Stand by Letter of Credit (SBLC), following guidelines must be adhered to:
Issuance of BG / SBLC, being a non-funded exposure, should be rigorously

evaluated as any other credit proposal such facility will be extended only for
guaranteeing export performance.
Firm / irrevocable supply orders should be in place. The contract with the overseas party /buyer
should be vetted. Product pricing should be in consonance with prevailing international prices.
The facility is to be provided only to those entities, which have not come under the adverse notice
of Enforcement Directorate or any such regulatory agency or have not been caution listed.
Such advances should be adjusted through future exports.
The documents should be routed through one Authorized Dealer bank only.
AML / KYC guidelines and due diligence for the overseas buyer should be carried out so as to
ensure that it has good standing / sound track record.
SBLC may be issued for a term not exceeding two years at a time and further rollover of not
more than two years at a time may be allowed subject to satisfaction with relative export
performance as per the contract.
SBLC issued from India in favour of overseas buyer should not be discounted by our overseas
branch / subsidiary.
Standby letters of credit/guarantees etc. on behalf of overseas JV/WOS/WoSDS of Indian

companies should not be issued for the purpose of raising loans/advances of any kind from other
entities except in connection with the ordinary course of overseas business.
SBLC should be established for the purpose only in line with the business activities carried out by
the customer (applicant) for genuine business transactions. The terms and conditions are to be
scrutinized to ensure that there will not be any violation under RBI /FEMA / other regulatory
guidelines.
Shipments under SBLC should not be to/from banned countries/ companies
Devolvement of LCs
Guidelines as per BCC:BR:107:429 dated 03.09.15 with respect to Change in accounting of

Devolvement of LCs issued are to be complied with. Further It is decided in the matter that
henceforth, feeding of ‘Limit Node’ shall be mandatory while opening/issuing and LC/BG in finacle
with immediate effect.
TEST YOUR UNDERSTANDING
1) A Transferable LC is one that can be transferred

a) Only once, i.e. From the First Beneficiary to any number of Secondary Beneficiaries
b) Only once to one second beneficiary or
c) To any number of beneficiaries several times
d) Only by first beneficiary to second beneficiary and not vice versa
2)In a LC transaction, Beneficiary is:

a) The Exporter/Seller
b) The Importer/Buyer
c) The Exporter’s/Seller’s Bank
d) The Importer’s/Buyer’s Bank
3) In a LC Transaction, Applicant is:

a) The Exporter/Seller
b) The Importer/Buyer
c) The Exporter’s/Seller’s Bank
d) The Importer’s/Buyer’s Bank
4) In an LC transaction, applicant is ……………………..

a) seller
b) purchaser
c) beneficiary
d) All of these
5) If an LC has neither ‘Revocable’ nor ‘Irrevocable’ marked on it, under

UCPDC guidelines, the LC would be assumed to be:
a) Revocable
b) Irrevocable
c) Either of these two
d) Depends upon the commercial Invoice
6) A confirmed letter of credit gives more assurance to:

a) Applicant
b) Beneficiary
c) Both
d) None
7) Which of these is not true for a Bill of Lading:

a) It is a document of Title
b) It is issued by the shipping company
c) It is a valid evidence for possible insurance claim
d) It must contain the value of the good
8) In a Bill of Lading, the ‘shipper’ is

a) The Exporter
b) The shipping Company
c) The shipping Company’s Agent
Answer true or False :
9) Standby Letter of Credit is similar to a Bank Guarantee:…………….
10) Bill of Lading is a title to goods:…………….
11) Beneficiary is importer under LC.…………….
12) Packing credit is a Pre shipment credit:…………….
13) A "Contract of Guarantee" under the Indian Contract Act is a contract to perform the promise
or discharge the liability of a third person in case of his default:…………….
14) Revocable credit can be cancelled or amended at any time without the prior knowledge of the
beneficiary:…………….
15) For the purpose of Discretionary Lending Powers, a DPG is treated as a Fund Based
facility:…………….
16) Guarantees favouring tax/ customs/excise/court authorities in respect of disputed claims,

payment of taxes, customs and excise etc. will come under the classification of performance
guarantees:…………….
17) Bank does not undertake to perform the obligations undertaken by the customer under the
performance guarantees, but only to fix the financial responsibility in the event of default or
failure on the part of the customer to perform the obligations undertaken by him:…………….
18) The bank adding confirmation to the letter of credit, which undertakes the responsibility of
payment by the issuing bank and on his failure to pay is called Confirming Bank:…………….
19) In respect of the disputed amounts in litigation like in family disputes, compensation money etc.
the guarantee should be backed by 100% cash margin without exception:…………….
20) Non Fund based limits are the facilities extended by banks to the clients with flow of
funds:…………….
ANSWER KEY
1 2 3 4 5 6 7 8 9 10
a a b b b b d a T T
11 12 13 14 15 16 17 18 19 20
False True True True True False True True True False
11. TERM LOAN APPRAISAL
Quick Bites:
 Technical & Environmental Appraisal
 Market Appraisal
 Financial Appraisal
 Economic Appraisal
 Other Important aspect with respect to Term Loans
 Guidelines for TEV Study
A. Introduction
Term Loans are used for financing fixed / capital assets. Term Loans are repaid out of Cash
Generation from operations over the entire repayment period as opposed to Working Capital
Facilties which are repaid out of sale proceeds of current assets.
The essence of the term loan appraisal is to assess the ability of the unit to repay the loan and
interest thereon, from surplus generated within a reasonable period of time by utilising the
fixed assets acquired.
The entire appraisal process can be segregated into following sections.

1. Borrower Appraisal
2. Management Appraisal
3. Technical Appraisal
4. Environmental Appraisal
5. Market Appraisal
6. Financial Appraisal
7. Economic Appraisal
In the above list, items listed as S.No. 1 and 2 have been detailed in the seperate Chapters.
B. Technical and Environmental Appraisal of the project:
Appraisal of a project from technical point of view has two major areas of analysis:
I. Availability of suitable Infrastructure / Resources
II. Appropriateness and feasibility of the technology involved
III. Licensing / Registration / Permission Requirements
I. Availability of Infrastructure / Resources
1. Land:
A proper inspection of the land would help in deciding its appropriateness. A wrong site
selection may result in flooding of factory, difficulties in input procurement, sinking of heavy
machines, difficulties in marketing of produces etc. The following areas need to be examined
a) Location of the Factory / Plant / Project is to be appraised on the basis of
proximity to source of raw materials, availability of transportation facility / Railways /
port. Sometimes government incentives for setting up a project in a specific location
are also available
b) Size and shape of the land should be adequate / appropriate to the project
proposed. Further the size of the available land should not only meet the present
requirements but also take care of the future expansion plans.
c) Natural / geological / climatic conditions may be taken into consideration. In
certain projects, soil analysis of the project site may also be carried out with respect
to Hardness, Salinity and acidity. Investigations of the history of earthquake and
flood in the area may also be carried out in this regard
d) Examination of Legal Status: The land should be freely marketable and its title
deed free and clear of all encumbrances. Care should be taken about the nature of
land i.e. agriculture, industrial, freehold, leasehold etc.
2. Power:
a) For setting up industrial units availability of regular and adequate amount of
power is very important. If it is not so, arrangement for installation of a captive
power plant/ generator etc. should be made which would result in escalation of
project cost and thus affect profitability.
b) Proper arrangements should have been made for supply of adequate power by
State Electricity Boards etc. If not, till such time such an arrangement is made some
stand-by arrangement in the form of hiring a diesel generator set should be made.
c) Source of energy for furnaces / ovens autoclaves / boilers should be understood.
Arrangement and alternative arrangement for various energy sources such as Coal /
Natural Gas / Electricity etc should be examined.
3. Water:
a) Many projects involve consumption of large amount of water either in the
manufacturing process as a raw material or as a cooling agent or for use in
generating steam.
b) Availability of adequate supply of water either through regular connection or
through sinking bore wells is very vital for appraisal of the project. Reports of Ground
Water Board may be obtained regarding the ground water level and the quality of
water.
4. Manpower:
a) A quick survey of the nearby units will throw some light on the labour market.
b) Sophisticated technology or machinery requires skilled and technically qualified
personnel for efficient operation and carry out preventive maintenance / regular
repairs. As such availability and turnover of such personnel should be analyzed as
part of the appraisal.
5. Availability of suitable raw materials and consumables:

a) The easy and regular availability of raw materials and consumables is a critical
condition for successful operation of a project. If the suppliers are few, necessary
firm tie-up arrangements with them should be ensured.
b) In case of import of raw material, licensing requirements should be looked into.
Further, in case of imported raw materials, their import in a bunch or bigger lots may
sometime become necessary resulting in excess inventory for a long time and the
unit will have to incur additional working capital cost.
II. Selection of Technology:
An important aspect of technical appraisal of a proposal is the critical examination of the

technology/technical process selected for the project.
The technology proposed for a project may be:
 Proven technology with track record
 Or a New or Evolving technology
Further the technology may be
 Indigenous
 Or Purchased / licensed from foreign parties / collaborators
The main points to be considered in this regard are:

1. Availability:
a) The technical process/technology selected for the project must be
readily available. The technical process selected is to be critically compared with
other technical processes in operation for manufacture of similar products to
establish superiority over other process. Similarly if the process selected is already in
use in other similar units, a certificate from such units regarding its performance etc.
should be obtained to satisfy its suitability.
b) In case of foreign technology, the selected technology must find a successful

application in Indian environment and the management should be capable of fully
absorbing the technology. It should be ensured that the technology is neither
obsolete nor out of date. Further the collaborating agreement should be studied and
clauses regarding royalty, any obligatory provisions for exports at concessional rate
etc should be examined from RBI/FEMA/Government regulations point of view.
Further the agreement regarding foreign collaboration should be carefully studied

regarding transfer of technology, selection of plant and machinery, role of foreign
collaborations in plant installation and project commissioning, warranties and support
at various stages
c) New or evolving technology should be critically examined. Its commercial viability

should be established before an exposure by way of Bank Loan may be considered.
Usually Family funding, venture capital funding, Seed Funding etc may be more
preferred route for financing such ventures.
d) Some plants may require longer time for delivery which may affect the
implementation schedule resulting in cost over run.
e) Necessary arrangements for servicing of the machinery, supply of spare parts
and consumables are also to be examined, so that there are no production
bottlenecks due to failure of plant and machinery in the long run.
f) Encouragement should be given to process/technology conforming to ISO 9000

specifications/certifications
g) The selected technology should not only be modern, state of the art and of
proven track record but it should also be ensured that a provision is made for the
technology to be constantly upgraded. The R & D (Research & Development)
facilities should be provided for absorption and continuous updation of technology.
2. Plant Size and Production Capacity:
Optimum capacity of the unit should be arrived at because creation of over capacity may increase
the cost of capital and affect the working of the project and Underutilization of plant capacity
results in reduced profitability.
The selection of plant size and production capacity is mainly dependent on a combination of
following factors:
 Market Potential
 Economies of Scale
 Government guidelines
 Capital outlay by the promoter
III. Licensing/Registration/Permission Requirements
1. List of licenses / approvals / consents / clearances / registrations should be appraised along

with the status / progress. Timelines for the same should also be analyzed and used to
assess the achievability of project implementation / commencement of commercial
production etc. Such licenses should be obtained and produced before actual disbursement
of the advances sanctioned.
2. It should be ensured that all the patents / copyrights / trademarks etc. for the items /
products / processes are kept current at the time of appraisal.
3. Environmental Issues: In the context of stricter environmental / ecological / biodiversity

guidelines of government / pollution control board / forest department etc the project / unit
should be appraised from the angle of compliances required, effluent treatment plants
arrangements and any likely adverse social and environmental impact.
C. Market Appraisal:
1. Existence of a market for the product provides the rationale for its production.
2. Entry barrier in the industry / business to be studied i.e., a business/ industry with low
entry barrier will have lot of competition and hence may affect the pricing/profitability of the
customer. On the other hand entry into industry/business having high entry barrier may be
very tough, but thereafter it may have control on its market.
3. The capacity of the Borrower to influence his supplier / customer or vice versa to be
analysed to study its impact on the business/ project.
4. Validation of Demand - Supply Gap and the estimated growth of the demand for the
product is a critical aspect of Term Loan Appraisal.
5. Market size may be estimated based on the total number of industries producing similar
products, their installed capacities, utilisation of their capacities, their general levels of
performance, the degree of health or sickness prevalent in the industry and other such data.
Emerging integration trade environment such as WTO etc may impact especially the export
oriented units.
6. A reasonable estimate of the future revenues may be based on the historical trend,
estimated market size (Domestic as well as export markets) and likely opportunities
7. Any adverse movements in the industry i.e., macro conditions which may affect the
project in immediate / medium/long term to be analysed
D. Financial Appraisal
A realistic assessment of project cost is necessary to determine the source for its availability and to
properly evaluate the financial viability of the project.
Cost of Project
Each Item of the Project Cost should be verified and its reasonableness should be satisfied upon.
Major Elements of the cost of project are as under:
Elements of Cost of Critical aspects to be appraised

Project
Land and Site Documented Purchase price of Land as per Sale Deed
Development Registration Charges
Stamp Duty Paid on Purchase
Expenses on Land Leveling
Cost of Fencing
Cost of Installation of Gates
Cost of development of road
Building Main / ancillary factory Building,
administrative building
Godown.
Canteen and guest House etc.
Staff quarters
Soil tanks, walls, sewerage, drainages etc.
Garages etc.
Architect fees
Plant of Machinery Imported: Plant & Machinery
a. FOB Value of the plant to be imported
b. Shipping, Freight and Insurance
c. Import Duty
d. Clearing, loading unloading and transportation charges
e. Foundation & Installation charges
 Necessity of imported plant

 Necessary stores/spares also imported
 Quotation/orders (if already placed) of the plant.
 Import licence
 In case second hand plant is imported- report of
independent/registered/ approved engineer to be obtained
 Warranty
Indigenous Plants
a. Main Plant and other machines
b. Machinery stores and spares
c. Sales Tax
d. Transportation charges
e. Foundation and Installation charges
 Quotations received from various machinery suppliers
 Cross- check with some reputable suppliers
 List of main items of machinery to be purchased
 Orders, if already placed
 Terms of contract entered between supplier and purchaser
(borrower)
 Basis of selection of supplier of proposed machinery
Technical Know-how, a. Expenses of - foreign technicians/training for Indian technicians/
Engineering and drawings
Consultancy Fees b. Fee for- Technical know-how/ preparing project report
 Contract between the company, foreign collaborator and

consultant
 Past record of consultant
 Relationship; if any between promoter and consultant
Miscellaneous Fixed  Power Distribution Systems
Assets  Electric Installation
 Furniture & Fixtures
 Laboratory Equipment
 Fire fighting equipments
 Effluent collection treatment and disposal
 Pollution control equipments
Preliminary Expenses  Expenses on drafting and printing the memorandum and
articles of association
 Consultancy charges for preparation of DPR (Detailed
Project Reprot), Feasibility Report, Market Surveys
 Other expenses incurred before the incorporation of the
company including registration charges, legal fees etc during
the pre-incorporation stage
Pre-operative Expenses  Interest During Construction (IDC)
 Expenditure on trial run
 Expenses incurred after incorporation and before
commencement of commercial production
Provision for  A reasonable and justifiable 5-15% provision for
Contingencies contingencies for non-firm cost items
Margin Money for Working  Margin Contribution corresponding to the first full year of
Capital commercial production is considerd in the project cost
 However if probability estimates of first year indicate cash
loss, take working capital requirement on basis of the
production for second or third year when the project is likely
to generate profit.
Means of Financing:
Various sources from which a project is generally financed are –
 Issue of Equity share capital
 Internal cash accruals
 Preference Capital from Preference Shareholders
 Issue of debentures/bonds
 Unsecured / Subordinated Debt / loans
 Deferred payment credit from suppliers
 Capital Subsidy from Government
 Lease Finance
 Term loan / DPG
Margin / Promoters Contribution:

The most important role of promoters contrubtion is to ensure their ‘Skin in the Game’. Appropriate
Promoters contribution also protects the lender from erosion of value of security and maintaining
acceptable FACR during the currency of the loan.
Usual Margin requirement in Term Loan Appraisal:
In case of Factory Land & Buildings - overall margin of 30%
In case of Plant & Machinery and Equipment - 25%
In exceptional cases, finance for 2nd hand machinery may be considered with a minimum margin of
40% at the discretion of the Sanctioning Authority.
Bankers have to ascertain the source and quality of equity capital brought in by the promoters
/shareholders. Multiple leveraging, especially, in infrastructure projects, effectively camouflages the
financial ratios such as Debt/Equity ratio, leading to adverse selection of the borrowers. Therefore,
bankers should ensure that debt of the parent company is not infused as equity capital of the
subsidiary/SPV.
Subsidy: Where capital subsidy from Central/State Government is included as a source of
finance, bankers should note that normally such subsidy takes a long time to be released by the
concerned Government Department. As such, borrower should give an undertaking to bring in
an equivalent sum from his own sources till the actual receipt of the subsidy amount.
Internal Cash Accrual: If 'cash accrual' is shown as a source of finance, it should be noted
that such funds are available only gradually over the year/period of the project, subject to
satisfactory performance and achieving the estimated cash flow. Branches, therefore, should
verify whether the ‘cash accrual’ amount shown is in consonance with the expected cash flow.
Further, the borrower should be advised to bring in an additional amount as his contribution equal
to the 'cash accrual' component till such time the cash is actually accrued. An undertaking to this
effect should be taken and it should be ensured that bank loan is released only after ensuring
that the borrower has brought in an equal amount, as above, to make the project viable.
Estimation of Cost of Production and Profitability

 As already stated the purpose of term loan appraisal is to ensure that the unit
will be in a position to generate sufficient surplus/profit to repay the loan and interest
thereon, by utilising the fixed assets acquired from bank's loan.
 Thus, the repayment capacity of the borrower to repay the loan is not linked
to the value of security etc. but it is linked to its ability to generate sufficient surplus
from its operations.
Estimating Cost of Production:

For estimating the cost of production, several factors have to be considered as discussed below:
1. Installed capacity:
 For assessing the installed capacity, it is essential to know the rated capacity of the
entire plant and the capacity guaranteed by the supplier for each equipment. Such
guaranteed capacities are indicated in terms of number of units/tones per unit of time
say hour, day etc.
 The installed capacity is determined by the capacity of that section of the plant which
has the lowest capacity and is calculated in terms of output per hour/day and per year,
which in turn is dependent on the number of shifts, number of hours in a shift, number of
operating days in a year etc.
 The installed capacity can change according to the direct inputs, product mix etc.
2. Capacity utilization:
 Normally the installed capacity is not fully utilized. The capacity utilization is low in the
initial years due to following reasons:-
Teething problems in the plant & machinery
Time taken in the development of product of satisfactory quality.
Development of operating skills.
Technological constraints etc.
 Gradually the plant is generally expected to achieve higher capacity utilisation.
 However, 100% capacity utilisation is generally not achieved due to various factors and is
not taken for estimation of cost of production. The average capacity utilisation of the industry
over the past few years, capacity utilisation of similar units etc. would be the guiding factor
in accepting the level of capacity utilisation.
 It is normally assumed that the maximum capacity utilisation is achieved in the 3rd/4th
year of production and is assumed to remain so thereafter.
3. Product mix:
 When the plant with a specific installed capacity can produce various types of products
with different input costs and sales realisation, the profitability estimate varies with change
in product mix. The decision on the product mix would, therefore, generally depend upon the
contribution of each product towards profitability, demand for the product and the adequacy
of the plant and utility facilities.
4. Selling price:
 In the case of produce, whose prices are controlled by the government, assuming the
selling price would not be a problem. In the case of products whose price is not controlled,
it is to be decided on the basis of current market prices and price trends in the past.
 In the case of a product, which is presently not manufactured in the country,
but is being imported, the selling price would be near to the landed cost of the
imported product. In the case of variation in selling price, the lowest selling price is assumed.
5. Unit cost of production:

 The elements of costs that make up the unit cost of production are the cost of
raw materials, chemicals, components, consumables, power, fuel, water, etc.
 These are calculated on the basis of actual consumption pattern in the industry
and the consumption pattern indicated by the plant / machinery / technical know-how
suppliers, based on their experience.
 The consumption shall also include losses during transportation, handling, loss of
weight due to mixture etc.
 The cost would include cost at site i.e. loading, transportation, unloading expenses etc.
 The cost of raw material depends upon its quality, source of supplies, volume of
purchase etc. If the cost of raw material is very important to the economics of the process,
it is essential to negotiate a contract price on the basis of volume of purchase.
 The costs assumed here are current costs without considering any likely/future cost
escalation due to inflation etc.
 The cost of power shall include demand charges, energy charges, taxes etc.
6. Labour:
 The labour requirement would depend upon the sectional and shift requirements with
provision for leave reserves etc.
 The cost of labour will be guided by the wages prevailing in the location of the plant.
7. Repairs and maintenance:

The cost incurred on repairs and maintenance would include cost of material required, manpower
and overheads for supervision and services. Generally, it is provided on the basis of a certain
percentage of fixed investment say 2% to 5% depending upon the industry.
8. Plant overheads:
 All costs in the plant which are not chargeable to any specific operation are
considered as plant overheads and charged to the manufacturing cost of the product.
 The above includes factory supervision, light, rent, taxes and insurance on factory assets.
 While the taxes would include local taxes, the insurance cost would depend upon types of
risks covered and value of assets covered. Normally, risks(comprehensive) of fire, explosion,
storms, burglary, floods, earthquakes, etc. are covered.
9. Administrative expenses:
These include administrative salaries, remuneration to directors and other office expenditure.
10. Packing cost:

This includes the cost of the container as also expenses involved in packing, besides the cost of
packing materials.
11. Sales expenses:

These include salaries of sales personnel, expenses on warehousing, advertising, technical
services, customer service, as also the commission payable to the selling agents. The
commission generally varies from 2 to 25% depending upon the product.
12. Financial expenses:

 These include interest on bank borrowings for term loans, working capital, unsecured
loans, guarantee commission etc.
 The interest on term loan is calculated on the basis of disbursing schedule, schedule of
repayment, mode of charging interest. The reducing balance method is to be adopted for
such calculation. Interest tax, if applicable, has to be included.
 The interest on working capital would depend on average level of working capital
finance utilised, which in turn is dependent on the level of holding of inventories,
receivables, margin prescribed by the bank, rate of interest etc.
 The interest rate of unsecured loans would depend upon the rate of interest allowed
to be paid as per terms of appraisal. It should not be too high.
 While computing the interest cost, it is assumed that the borrower will repay the
instalments and service the interest promptly.
 The interest rate assumed is the contracted rate as on date of proposal and no increase or
decrease are assumed over the years.
13. Depreciation
 The calculation of depreciation provision is done on the basis of depreciation rates
provided under the Companies Act. W.e.f. 01.04.14 new Companies Act 2013 has come into
force according to which useful life of assets have been prescribed as per Part C of Schedule II
of the Act instead of rates as was prescribed under the old Companies Act 1956
 For computing the depreciation for financial projections following adjustments in the cost
of fixed assets is to be made
 The pre-operative costs, preliminary expenses & contingencies which are allowed
to be capitalised are to be added to the cost of land, building, plant & machinery etc. in
proportion to the share of these costs in the total capital expenditure. To illustrate -
 Assume that pre-operative expenses, preliminary expenses and contingencies which
can be capitalised is Rs.10 lacs. The cost of land, building etc. are required to be restructured
as under:
Proportionate Share Revised Cost on which

Original of expenses to be Depreciation is to be
Cost % Share provided provided
Land 2.0 2% 0.2 2.2

Building 20.0 20% 2.0 22.0
Plan& Machinery 60.0 60% 6.0 66.0
Misc. Fixed Assets 18.0 18% 1.8 19.8
Total 100.0 110.0
* Including contingencies as per cost of project.
 No depreciation is provided on land.

 It is assumed that the entire capital expenditure is incurred during the construction
period itself and full year depreciation is provided irrespective of actual date of incurring
the cost.
14. Income tax:

The computation of income tax liability is a complex matter which varies from company to company
and is dependent upon various concessions available under the act. For this, the opinion given by
the statutory auditor/tax consultant may be accepted.
15. Project life:

The estimation of the cost of production is usually done for the entire project life or the proposed
repayment period of the term loan..
16. Sales:
 It is always assumed that all the products manufactured are sold and sale proceeds
realized. No provision for bad debts etc. is assumed.
 All costs and sales realizations are valued at rates applicable on date for the entire
repayment period/project cycle. No Sale price escalation is assumed.
Financial Ratios
1. Debt – Equity Ratio (DER)

concern.
Debt-Equity Ratio = Total Term Liabilities (TTL) / Tangible Net Worth (TNW).
A ratio of 3:1 is considered satisfactory.

Bank takes total term liabilities as Debt i.e. total liabilities minus net worth and total current
liabilities. Equity means net worth of the concern minus intangible and fictitious assets.
may be considered as quasi-equity, generally for non-corporate borrowers, and included in
equity while arriving at ratio, if the borrower retains the same at the existing level/ projected level
during the currency of Bank Loan. The subordinated debt however should not exceed borrower’s
tier I capital i.e. capital plus free reserves less intangible assets.
Apart from DER (TTL/TNW), bank assesses the Debt Equity Ratio as Total outside Liabilities (TOL) to
Tangible Net worth (TNW) also. Total outside Liabilities (TOL) will be calculated as total of all
liabilities of a company/firm on liability side of balance sheet MINUS the net worth. A ratio of 4.5:1 of
DER (TOL/TNW) may be considered satisfactory.
2. Fixed Assets Coverage Ratio (FACR)

This ratio shows the number of times the value of Net fixed assets (after providing depreciation)
covers outstanding balance in Term Loan Account.
FACR=Net Fixed Assets / Term Debts (Medium &Long)
 FACR of 1.25 and above is considered reasonable. This ratio indicates to the extent to which
the bank remains in a position to fully recover the outstanding balance held in the Term Loan
Account by disposing the primary security at any point of time.
 Accelerated repayment may be stipulated wherein term loan is used to finance fixed assets
with high degree of technological obsolescence
3. Debt Service Coverage Ratio (DSCR)

Ability of a concern to service its term liabilities can be assessed from this ratio.
DSCR=(Profitaftertax+Dep.+Int.onTL)/(Int.onTL+TLInstallments).
 The average DSCR (i.e. the sum of numerator divided by the sum of denominator of DSCR
formula as stated above for entire repayment period of the loan) of 1.75 is considered
reasonable. However, in any year it should not be less than 1.25.
 Average DSCR should be worked out by dividing the total cash accrual over the entire
period of the project by total repayment obligations and it should not be be computed by
averaging the yearly ratios.
4. Interest Coverage Ratio (ICR)

This is a measure of calculating the company’s operating cash flow coverage of interest expenses.
ICR = EBIDTA* / Interest expense.
*Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA)/ Interest expense.
The higher the Interest Coverage Ratio, more secure the Bank is in respect of the interest servicing
ability of the borrower. An Interest Coverage Ratio of 5 may be considered satisfactory.
5. Break Even Point

The BEP is the point at which, cost or expenses and revenue are equal: there is no net loss or gain,
and the unit has "broken even".
BEP is calculated in order to determine at what level of sales the unit will be able to recover the
costs and will be generating profit at the sales level above BEP.
The BEP is calculated as per below mentioned formulae:-
Break Even Point (No. of unit) = fixed cost/ contribution per unit*
*Contribution (per unit) = selling price (per unit) – variable cost (per unit)
Break Even Point (sales) = {fixed cost/ contribution (per unit)} X sales price (per unit)
BEP s h o u l d b e c a l c u l a t e d in all credit proposals involving sanction of fresh term loan of

Rs. 20 Crore and above.
A lower BEP suggests that unit has adequate margin of safety (MOS).
Margin of safety = 1 minus BEP
MOS and indicates the proportion of sales which is available as cushion for any increase in variable
costs and is considered as profitability zone of the unit.
E. Economic Appraisal
1. The economic appraisal includes scrutinizing all the items of cost, and examining the
assumptions, if any, to ensure that these are realistic and achievable.
2. IRR, NPV, ROCE and RONW are critical ratios that are to be examined while carrying out
economic Appraisal
Net present value (NPV)

 This is to be compulsorily computed for Term Loan of Rs. 20 Crore & Above
 Net Present Value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows.
If... It means... Then...
The investment would add

NPV>0 value to the firm The project may be accepted
The investment would
subtract value from the
NPV<0 firm The project should be rejected
We should be indifferent in the decision whether to
The investment would accept or reject the project. This project adds no
neither gain nor lose value monetary value. Decision should be based on other
NPV=0 for the firm criteria, e.g. strategic positioning or other factors not
explicitly included in the calculation.
Internal Rate of Return

 This is to be compulsorily computed forTermLoanofRs.20Crore&Above
 The IRR of an investment is the interest rate at which the investment has a zero net present
value.
 IRR can be computed by iteration using a Spreadsheet such as MS-Excel by finding out
underlying rate which when used for discounting leads to zero NPV.
 IRR can also be worked out by using the IRR function [IRR(Value,Guess)] in MS-Excel
 A project is considered viable if it is generating an IRR greater than cost of capital. Branches can
compare the project IRR with the weighted average cost of funds proposed to be invested in
the project. The projects with an IRR greater than cost of funds should be considered for
funding.
Sensitivity Analysis:
 The DSCR and IRR, as explained above have been computed after assuming certain
values for various variable parameters like capacity utilization, cost of raw material, sales
price per unit, sales volume etc. Any adverse variation in the values of these parameters may
alter the values of DSCR and IRR so drastically that the proposal may become unviable and
unacceptable.
 As such it is advisable to compute the values of DSCR and IRR by altering the values of
following parameters by +10% or -10%
- Capacity utilisation
- Sale price per unit
- Sales volume
- Cost of raw material, Labour etc.
 If the values of DSCR and IRR computed as above get altered dramatically to a -10%
change in the value of any of the above variable so as to make it unviable, we may state that
the project is sensitive to variations in that parameter. This is called the sensitivity analysis.
This provides an opportunity to the Bank to analyse the financial viability even in adverse
situations.
Other Important Issues with respect to Term Loan
Schedule of Implementation
 The project report should contain the schedule of implementation of the project which
shall be supported by a PERT (Project Evaluation and Review Technique) chart, where
feasible.
 In case the PERT chart is not submitted, a time schedule for implementation of the
project should be drawn up before disbursement of loan.
 The progress of implementation of the project should continuously be monitored.
Wherever the terms and conditions stipulate disbursement of loan in stages, it should
be ensured that the work is complete upto the desired level before making further
disbursements. For this purpose, spot inspection should be carried out by the Branch
Manager or the officer authorised at each stage. Where considered necessary, technical
officer of the Bank or consultants should also be associated with such inspections.
 Where the progress of the project is not satisfactory, the reasons for the delay
should be ascertained and analysed. Any such delay would entail cost over-run. It may
also result in larger commitment by way of foreign exchange, wherever imported
machinery or equipment is involved, adding to the cost. In case of seasonal industries, the
delay in implementation may result in loss of business for the season. Where contractual
obligations are involved, the unit may be called upon to pay penalty for not maintaining
delivery schedule.
 All the above situations have serious implications for repayment of Term Loans.
Branches should, therefore, be extremely vigilant in monitoring the progress of the
project.
 The developments should periodically be advised to the Regional Authority and
instructions/guidance sought for taking remedial measures.
 In the case of a term loan for purchase of a particular equipment either for replacement
or for expansion, even though a close supervision of the entire working of the unit
may not be warranted, branches should ensure that the machinery is installed in time and
operating satisfactorily to give the desired results.
Fixing up of repayment schedule

 The usual repayment period of a term loan varies from 3 years to 7 years (including moratorium
period i.e. repayment holiday ) and it is considered taking into account the repayment capacity
of the borrower, cash generation etc.
 In case of capital intensive projects, it may be higher upto a maximum of 15 years. In
addition , Infrastructure finance is also made available for a period of more than 15 years, by
the Bank, on case-to-case basis on merits, in conformity with regulatory guidelines.
 The repayment period of a term loan is, therefore, fixed taking into account the DSCR and
the IRR.
 In cases, where DSCR is more than 2, branches may consider reducing the
repayment period suitably after considering all aspects.
Payment of Interest
 Normally interest on term loan is to be paid with monthly rests from the date of
disbursement.
 For Limits below Rs.25.00 lacs (regulatory) the rate of interest is delinked from credit
rating and is based on the category (micro, small, medium) and the exposure (slab).
 Rate of Interest applicable to the borrowal accounts shall be Effective MCLR (i.e. MCLR +
Strategic premium) plus Credit Spread as applicable based on credit rating and as per terms of
sanction w.e.f 01.04.2016.
Moratorium period
Moratorium period is the initial repayment holiday allowed to the borrower i.e. the time gap
allowed between the date of disbursement and the due date of first instalment. However,
borrower will continue to service interest during moratorium period. The due date should be so
fixed that repayment does not fall during the period when the unit is incurring cash loss or cash
accruals are very poor. . Moratorium period should be fixed considering Project implementation
period and Operating Cycle of the unit.
Security
 The term loan should be secured by Exclusive First Charge by way of hypothecation /
mortgage of fixed assets for which the loan is sanction.
 Besides, the bank should normally be further secured by first charge on the assets of the
firm by way of hypothecation/mortgage of other fixed assets and hypothecation of movable
assets.
 Where the existing block of fixed assets/movable machineries are already charged to
other banks or financial institutions, their specific permission should be obtained for
creating a charge in bank's favour on any specific item of machinery etc. financed by us
in the absence of a pari-passu charge.
 All such charges should be registered with the Registrar of Assurances and Registrar of
Companies, CERSAI etc.,wherever necessary.
 Wherever possible additional collateral securities in the form of equitable mortgage of
landed property in the personal name of partners / directors / guarantors should be
obtained.
 In case of newly purchased properties the registration value should be considered as the
realizable value for first year and the same be taken for the purpose of calculation of
FACR/Security Coverage Ratio.
Valuation reports to be countersigned by branch head accompanying the valuer during joint
inspection of the property to be mortgaged/proposed to be mortgaged.
 Before stipulating such securities, branch should ensure that the consent of the property
holder has been obtained and that the title of the property is clear and marketable.
 Wherever possible obtaining pledge of shares, government securities, units of
UTI, mutual funds etc. could also be explored to further securities the facility.
 Branches should maintain Plant & Machinery Register (borrower- wise) for recording
the following particulars of machineries charged to us and also to facilitate physical
verification.
- Date of purchase
- Details of machinery with identification numbers/marks
- Name of the supplier with address
- Invoice number and purchase price
- Depreciated value of machinery indicating the basis of calculating depreciation
- Condition of machinery (new or second hand)
- The valuation should be based on the acquisition price Depreciation should be
charged periodically as per any of the approved methods and should be consistent. The
method followed should be mentioned in the register. In no case should the
borrower be allowed to revalue the machinery or any other fixed assets to provide the
requisite margin. In the case of second hand machinery, valuation should be done by
Bank's technical officers or approved valuers and the report be retained on record.
Any addition or sale of machinery should properly be recorded in the above register.
Pre-Sanction Inspection:
 Before sanctioning the proposal, a pre-sanction inspection of the unit is essential to ensure
the purpose and end use of the funds.
 In case of an existing unit, a visit to the factory/site of production would give an idea
about the operations of the unit, the actual use of the machinery proposed to be
acquired, its location etc. It will also give an idea about the existing plant & machinery and
other fixed assets which are to be charged to the bank. Such an inspection would also
enable the branch to verify that the unit is genuine, it is in operation and the name,
address and other details furnished are correct.
 It will also enable the branch to physically verify the collateral securities offered as
security and ensure its location, valuation, sale ability etc.
 After inspection, a pre-sanction inspection report should be submitted along with the
proposal in the prescribed format The report should contain specific reference to the
following :-
 Particulars regarding industrial licence and registration with the relevant authorities
like DGTD, Textile Commissioner, Drugs Controller etc., as the case may be.
 Arrangements made for import of machineries.
 Details of collaboration agreement, if any, including the name of the collaborators,
nature of collaboration, royalty/ fees payable. In the case of foreign collaboration, details
of Government approval should be indicated.
 Government/RBI clearance in respect of FERA/MRTP companies and NRI investment.
 Particulars of land and terms of purchase/ lease.
 Permission of use of land for industrial purpose and under Urban Land Ceiling laws.
 Permission from municipal/ local authorities, if required.
 Position and availability of power.
 Time schedule for implementation of the project and progress made so far with reference
to :
 Land development
 Construction of buildings
 Purchase and erection of machinery
 Development works like construction of roads, extending electricity lines etc.
 Steps taken for raising the resources including arrangements made for issue of shares.
 Clearance from Pollution Control Board
 Arrangements made for recruitment of labour and other staff.
 Other basic information:
- The likely period by which trial/commercial production is expected to commence etc.
- A certificate from the auditors of the company regarding promoters'
contribution/investment made on date.
- A list showing details of existing fixed assets and others should be enclosed with the
inspection report.
Documentation and Disbursement

 Disbursement of Loan should be carried out only after completion of Documentation and
obtaining Authority for Disbursement as per bank guidelines.
 Disbursement should be stage wise as per the progress of the project
 Wherever direct payment to the suppliers or contractors is to be made, the relative bills
or invoices should be approved by the borrower and the latter's specific authority to make
payment be obtained. Photocopies of all such bills/invoices should be kept on record.
 Please refer to the chapter on Documentation for details on documentation
Guidelines for TEV Study based on Project Cost:
The guidelines have been issued vide Master Circular No.BCC:BR;105/249 dated 17th June 2013
and Domestic loan policy. Detailed guidelines need to be kept in mind and complied with. A gist of
the guidelines is reproduced as per the table below:
Cost of Project (COP) TEV Study
Upto Rs. 10 Cr TEV Study not mandatory

> Rs. 10 cr and < = Technical Officer at ZO
Rs. 30 cr or
Empanelled consultant.
>30 Cr <= Rs. 300 Cr Technical Officer in Scale III / IV at ZO (COP upto Rs.200.00 Cr)
Or
BOBCAPS
> Rs. 300.00 Cr BOBCAPS
For the fee structure of TEV study, the readers are requested to refer the circular no.
BCC:BR:109:646, dated 02.12.2017.
State true or false
Sr No Statement T/F
1 Availability of Basic Infrastructure is the part of technical Appraisal of the project
2 Water, Power, Location and Land etc are the Basic Infrastructure of the project
3 If Project Cost is Upto Rs. 30 crores then No TEV Study may be insisted upon
4 In exceptional cases, finance for 2nd hand machinery may be considered with a
minimum margin of 40% at the discretion of the Sanctioning Authority
5 If NPV>0, then The project should be rejected
6 The Interest Coverage Ratio is calculated as Earnings before Interest, Tax,
Depreciation and Amortisation (EBITDA) / Interest expense
7 The repayment period of a term loan is fixed taking into account the DSCR and the
IRR
8 Moratorium period should be fixed considering Project implementation period and
Operating Cycle of the unit
9 Debt Service Coverage Ratio (DSCR) is not an important ration for TL assessment
10 100% capacity utilisation is generally achieved in the initial years of operation of
unit due to new technology and machinery
11 If capital subsidy from Central/State Government is included as a source of
finance, than bankers should note insist for equity contribution from the promoter
12 In case of Plant & Machinery and Equipment, margin requirement is 25%
13 Repayment can be started when the unit is incurring cash loss or cash accruals
are very poor
14 If NPV=0 then the investment would neither gain nor lose value for the firm
15 BEP is calculated in order to determine at what level of sales the unit will be able to
recover the costs and will be generating profit at the sales level above BEP
16 FixedAssetsCoverageRatioofmorethan1.25isconsideredreasonable
17 Depreciation is provided on land
18 Guarantee of the person who is mortgaging the property is not compulsory
19 Sensitivity Analysis, provides an opportunity to the Bank to analyse the financial
viability even in adverse situations
20 A ratio of 4.5:1 of DER (TTL/TNW) may be considered satisfactory
1 2 3 4 5 6 7 8 9 10
True True False True False True True True False False
11 12 13 14 15 16 17 18 19 20
False True False True True True False False True False
12. Documentation
Quick Bites-
Documentation is process of formalizing the terms of agreement basis on which credit
facilities are granted between bank and borrower and creation of bank’s enforceable
charge on various securities through documents.
 WHAT IS "DOCUMENTATION"?
"Documentation" means obtaining of RELEVANT documents as per terms of sanction, to bind the
borrower for the loan taken and for creation of charge on security/securities. Nature of documents
varies with nature of the legal status of the borrower, nature of advance, nature of security and
terms and conditions. Mode of execution of documents also varies with the legal status of the
borrower.
 SIGNIFICANCE OF DOCUMENTATION:
Appropriate documents properly executed, signify and incorporate the following :-
a) The contractual relationship between the Bank and the constituent such as creditor - debtor,
agent-principal etc.,
b) The nature and description of the security, if any, offered for the advance, and
c) The terms and conditions of the advance.
 IMPORTANCE OF DOCUMENTATION:
Documents obtained by the Bank form the basis upon which a suit, as and when found necessary,
may be filed by the Bank in a competent Court of Law against the defaulting borrower. In the
absence of such properly executed documents, the onerous burden of proof falls on the banker.
CERTAIN IMPORTANT POINTS TO BE OBSERVED WHILE OBTAINING DOCUMENTS FOR

ADVANCES:
1. To obtain acceptance of all terms and conditions of sanction in totality of borrower/s and
guarantor/s of terms and conditions.
2. All relevant documents as stipulated in the sanction or as per the Bank’s practice, should be
obtained in respect of different kinds of facilities granted to the borrowers.
3. Documents must ordinarily be executed in the presence of the Branch Manager/ Accountant.
4. Attestation Memo (LDOC-1) should be filled in and kept along with the documents. However,
where a document is required to be witnessed as in the case of a Mortgage Deed, it may
be witnessed and the name, description and address of the witness should be given.
5. Where a document is executed by an illiterate or by a person not knowing the language in
which the document is written/printed, a letter as per LDOC-53 (Letter of Attestation)
should be obtained duly signed by a person conversant with English language as well as
the language of the executant and also known to the Bank. In addition, the officer in
whose presence the documents are executed should prepare a note as per LDOC-1 and
keep it along with the documents.
6. Documents should be complete in all respects and not to keep any blank space or column.
7. Each page of document, the executants should sign invariably and overwriting must be
authenticated.
8. All documents should state the date, month and year of execution (for determining
the period of limitation)
9. Normally, all documents should bear a uniform date of execution, unless a particular
document is of necessity required to be executed on a different date.
10. Document must mention place of execution (for determining the jurisdiction of courts in
case of disputes and for purpose of payment of proper stamp duty )
11. All details are to be filled up as per terms of sanction i.e. amount, rate of interest, name of
the borrower/s etc.
12. All documents should be properly and adequately stamped at or before the time of
their execution as per law in force.
13. The documents should be executed by the borrowers/ guarantors themselves. However, if it
is decided for valid and justifiable reasons to permit the Power of Attorney holder to
execute the documents
14. The documents should state full names of the parties. Initials /short names or abbreviated
names of the parties should not be written.
 DEFECTIVE DOCUMENTATION - ITS CONSEQUENCES:

What is meant by "defective documentation"?
i. Inappropriate documents, i.e. documents not relevant to the advance.
ii. Incomplete set of documents.
iii. Documents not filled in / partially filled in / incorrectly filled in.
iv. Documents with unauthenticated over-writings / erasures / cancellation/ corrections /
insertions.
v. Unstamped or inadequately stamped or improperly stamped documents.
vi. Documents not executed properly or not executed by all the persons who are required to
execute such documents.
vii. Documents executed by person/s incompetent to contract, i.e. by persons who have no
legal capacity to contract and hence to borrow.
viii. Documents executed by persons not authorised to so execute, e.g. by agents who do
not have necessary power to borrow and execute the documents.
Consequences of Defective Documentation:

Defective documentation may lead to a situation where the Bank may either lose the legal remedy
against the borrower and/or the guarantor or may not be able to enforce its rights and the advance
may become irrecoverable.
 CREATION OF MORTGAGE BY DEPOSIT OF TITLE DEEDS
 Practice and Procedure:

A. Deposit of all the material Title-Deeds by the mortgagor to the Bank at the Notified
Place.
B. Recording the act of Deposit of Title-Deeds either by way of a Memorandum of Deposit
of Title Deeds or recording Oral Assent of the mortgagor in the Banks' book, to show
the intention to create security by way of mortgage for particular advance or advances.
C. Obtaining confirmation letter from the mortgagor regarding such deposit of title deeds.
D. Registering the memorandum of deposit, in cases when such registration is required.
 Delivery of Title-Deeds:
a) There should be delivery of all the material and relevant title deeds relating to the
property, by the mortgagor/s to the Branch Manager of the Bank, who will be acting for
and on behalf of the Bank.
b) The delivery of the title deeds should be made by the authorised persons, who have
the right and the capacity to create such mortgage.
 What are Title Deeds / Documents of title :
a) Title deeds mean the documents relating to the property and which are material
evidence of title. The documents must not only relate to the property but must also be
such as to show prima facie title of the mortgagor.
b) Mortgage by deposit of title deeds is created by deposit of only ORIGINAL title-deeds,
such as Sale Deed, Conveyance Deed, Lease Deed, Gift Deed, Trust Deed, Will, Sale
Certificate, Share Certificate or Membership Certificate with Allotment Letter in case of
Society or Non-Trading Association etc.
c) Copies of these material deeds / documents are not the title deeds and should not be
accepted in normal course.
d) Agreements of Sale or of Lease are not Title Deeds. The copies of the Government
Records or Revenue Records are also not the documents of title.
e) Mortgage of agriculture land to secure non - agriculture advance requires permission of
the Land Revenue Authorities and encumbrance should be got noted in the land records.
For any activity other than agriculture on agricultural land, conversion of agriculture land
into non – agriculture usage is must.
 Places where it can be created :

A mortgage by deposit of title deeds can be created only at the places which are notified by the
State Government for purpose, from time to time. A list of such notified places will be available
from the Government Gazette.
 MEMORANDUM OF DEPOSIT OF TITLE DEEDS:

 Such Memorandum records the fact of the mortgagor/s (stating their names) delivering
the title deeds to the Bank with an intent to create a mortgage on his / their property
(which is described) as security for the repayment of the advances (giving nature of
facilities, amount, rate of interest, etc. ) granted by the Bank to him / them.
 Such Memorandum contains two Schedules. One Schedule shall give full details of the
mortgaged property. The other Schedule gives a list describing the title deeds which are
deposited.
 The Memorandum is signed by the mortgagor/s and two witnesses. All the particulars
such as, the names of the persons attending the branch and depositing the tittle deeds,
the date of such deposit, amount/s of limit/s to be covered under the mortgage security
and the rate of interest for each facility etc., are required to be duly filled in and
completed before execution.
 The Schedules should be correctly completed. All the title deeds which are deposited
should be included in the List of Title deeds. In the Schedule of mortgaged property, full
description and details with boundaries should be described so as to give proper
identification of such property.
 Description of Property :-
a) A mortgage is a transfer of interest in a specific immovable property. Hence, great
care should be taken to ensure that full and correct description of the property
mortgaged is given such as, Revenue Survey Number, Plot Number,
House/Tenament Number, Location or Number of Road/Street, Area, Village, Taluka,
District, etc., giving the particulars of the boundaries.
b) If the description of property is too general or vague, it could lead to difficulties at
the time of enforcement of mortgage.
c) If the property is wrongly described, it would mean taking a mortgage of some other
property, not belonging to the mortgagor. In that case, the Bank may not be in a
position to execute the mortgage decree even when it is obtained against the party.
 Stamping of Memorandum:-
a) Any instrument evidencing an Agreement or Memorandum of Agreement relating to the
deposit of title deeds attracts stamp duty under Article 6 of the Indian Stamp Act and
under the corresponding Article in the Schedule of the Local/State Stamp Law. Hence,
the Memorandum should be got stamped accordingly.
b) Normally, the Stamp duty for a Memorandum of Deposit of Title Deeds is comparatively
less than the stamp duty prescribed for a Mortgage Deed.
c) However, it may be noted that in order that such Memorandum is considered as an
Agreement relating to deposit of title deeds should merely contain the bargain between
the parties in relation to deposit of title deeds and conditions ancillary to such deposit. If
it contains all the provisions which contain the contract between the parties which are
normally found in a Mortgage Deed, then it would not make it an 'Agreement for deposit
of Title Deeds.'
d) Mortgage by deposit of title deeds can be created at any notified place. In some states
the Memorandum of deposit does not attract stamp duty. Such an opportunity though
can help in avoiding payment of stamp duty for some time but it should not result in
evasion of stamp duty. At any later date the Memorandum may have to be brought back
for the purpose of enforcing the mortgage and at that point of time the stamp duty will
become payable.
 MEMORANDUM OF ENTRY OR ORAL ASSENT
 The Memorandum of Entry is recorded accepting deposit of title deeds not on the same day
on which mortgage by deposit of title deeds was created but on any day subsequent
thereto, preferably the next day. This is done with a view to establish that entry is simply a
recital of earlier transaction.
 In the Memorandum of Entry, the time, date and place of deposit of title deeds are clearly
recorded and it is dated on a subsequent day.
 The Entry is signed only by the authorised official of the Bank, who has accepted the deposit
of title deeds and witnessed by one or more witnesses.
 No signature of the Mortgagor is taken on the Memorandum of Entry or Oral Assent.
 The Entry records that the mortgagor/s had deposited the title deeds with intent to create
mortgage on the property (description is given) in favour of the Bank, as security for the
advances (facilities, limits, rates of interest, etc., are described) granted by the Bank to the
mortgagor/s. It also contains declaration that the property is absolutely owned by him and
that he has clear marketable title; that there is no charge, lien, encumbrance, attachment
etc., on the property; that the mortgage shall be the continuing security for the advances
etc.
 Such entry serially numbered is generally made in handwriting in a bound Register with
pages serially numbered. It should never be in loose leaf form. The list of the title deeds and
the Schedule of Property over which mortgage is created should be written as part of such
Entry.
 Whenever a Confirmation Letter is obtained, it should not be on the same date but should
be on the next day of the Date of Entry.
 The record of Entry of deposit of Title deeds thus made in the Bank's books is admissible in
evidence in the court of law as primary evidence of transaction under Section 4 of the
Banker's Book Evidence Act.
 NO PARTING OF TITLE DEEDS
 At no point of time during the continuance of mortgage, the title deeds or any of the title
deeds should be parted with or delivered to the mortgagor or his representative. The parting
of title deeds even for a temporary period may create complications affecting the continuity
of the mortgage. Section 78 of the Transfer of Property Act states that where through the
fraud, misrepresentation or gross neglect of a prior mortgagee, another person has been
induced to advance money on the security of already mortgaged property, the prior
mortgagee shall be postponed to such subsequent mortgagee.
 In the event of inspection of title deeds is requested, it may be allowed to be done in the
presence of a Bank's official at the Bank premises only.
 The title deeds should be kept in a separate file in a fire proof cabinet under the duel control
of responsible officials.
 PRIORITY OF MORTGAGE BY DEPOSIT OF TITLE DEEDS
 A validly created mortgage by deposit of title deeds shall stand on the same footing and
has the same legal force as that of any other form of mortgage. Therefore, a mortgage
created by deposit of title deeds at a prior date shall have priority over any other mortgage
executed at a later date.
 As per Section 48 of the Registration Act, a mortgage by deposit of title deeds shall take
effect against any mortgage deeds subsequently registered though relating to the same
property.
 MORTGAGE FROM A GUARANTOR

1. Under Section 58 of the Transfer of Property Act, a mortgage can be for the purpose of
securing the payment of money advanced or to be advanced by way of loan or for any
existing or future debt or for the performance of an agreement which may give rise to a
pecuniary liability. Thus, a mortgage can be created by a guarantor to any advance on his
property.
2. The procedure for creating a mortgage of the guarantor's property will be the same as in
case of creating a mortgage of the borrower's property, except that the relative recital in the
Memorandum of Deposit of Title deeds or in the Memorandum of Entry will mention the
name of the guarantor as mortgagor depositing the title deeds for the facilities sanctioned to
the borrower whose name will appear at appropriate place along with the facilities.
3. The third party mortgage can only be from a guarantor.
 PRECAUTIONS FOR CREATION OF MORTGAGE:
Following steps are to be followed for creation of valid and enforceable mortgage:
 Before creation of a mortgage by deposit of title deeds, branches to ensure that the title
deeds are verified and report on title obtained from Advocate on the panel after they
conduct searches in the appropriate records of the Sub – Registrar of Assurance and
Revenue / Municipal records, upto the nearest date of creation of mortgage. The advocate
to certify that the title deeds relating to concerned property are original, duly stamped and
wherever required duly registered and title is clear, marketable and free from
encumbrances.
 Branches to insist on opening of bank account as per ‘ KYC’ norms by owners of the property
who offer the same as mortgage security against the loan given to third parties. Copies of
House Tax receipts / Electricity Bills etc. are to be obtained as proof of possession /
residence.
 In case property proposed to be mortgaged is under tenancy / leased to a third party, the
same will reduce the marketability and value thereof. It is necessary to take this aspect into
consideration while accepting such property as security.
In respect of advance accounts with limit of Rs1.00 crore and above, Branch Head
alongwith Joint Managers/ Officer In-Charge of credit department have to confirm that they have
gone through the complete NEC/ Title Clearance Report and mortgage has been created strictly
complying with the opinion report of the advocate and after considering all the remarks in the
report of the advocate/ valuer. A confirmation should also be prepared and signed jointly by the
Credit-In-Charge and Branch Manager.
(Format in annexure 2 of the circular BCC:BR:106:408 dated 16.10.2014).
In case of takeover of Retail Loans, Advocates can provide TCR based on the Photo copies of the
Title deeds, supported by its certified copies. Authenticity of original Title deeds to be ascertained
immediately upon receipt of original documents from existing lenders, subsequent to taking over of
the account, and disbursement of the loan.
 SAFE CUSTODY OF ORIGINAL SECURITY DOCUMENTS AND TITLE DEED
Instances have come to the notice of the Bank that original documents and /or original title deeds
are found missing either after lapse of considerable time / period from the date of security creation
or after filing of recovery suits etc. Many times it happens that branches hand over the original
security documents and title deeds to the Advocate for filing of suit / DRT application etc. but do
not collect/obtain the same back promptly and properly. No record is maintained at the branch that
original documents are handed over to the Advocate which have not been returned by him. As a
result, as and when it is required to present the original documents etc. in court/ Tribunal the same
are not found or not traceable.
To overcome this situation, given below are the guidelines for safe custody of original documents,
title deeds, etc.,
1. While going to the Advocate/s for preparation to file suit, etc., the concerned branch officials may
carry with them and deliver to the Advocate/s a photocopy of the originals, and the original
documents, after perusal by the Advocate/s, may be brought back intact and kept in the safe
custody of the branch. This course of action is designed to avoid any possible loss / misplacement
of security documents/title deeds.
2. Alternatively, as far as possible, our advocates may be requested to call on the branch, peruse
the documents, etc., at the branch premises itself and do the needful further so as to obviate the
need for the branch to keep track of the original documents and title deeds.
3. It is the Bank's recognised practice to send documents, etc., - originals or even photo copies to
advocates / other branches along with a forwarding letter and to obtain the Advocate's / the other
branch's acknowledgment of receipt thereof, and this practice should be strictly followed by all the
branches.
4. According to the practice prevailing at the particular place of filing suit, etc.; the Advocate may
file security documents and title deeds -- original or copies as per the requirement -- in the court or
other legal forum. In either case, advocate's written confirmation has to be obtained.
5. Branches should never part with the originals without retaining the copy thereof with
themselves.
6. Safekeeping of documents and records is the sole responsibility of the branch officials concerned,
the same being an operational matter, and utmost care is expected of the personnel handling the
same. It is, therefore, necessary that the factual position as to the availability of the originals is
verified by the concerned officials even at the time of every change over on transfer or job rotation
involving key officials of the branch.
Periodicity of renewal of documents:
1. In case of all advances the renewal documents should be obtained before the end of the
fourth year calculated from the date of the documents on hand. But a letter of
acknowledgment of debt signed by all the signatories who have signed the original
documents, should be obtained at the end of every second year, calculated from the date of
documents on hand for all types of advances whether the advance is to limited companies,
firms or individuals.
2. In respect of advances to limited companies, as also documents involving payment of

substantial stamp duty, the matter regarding obtaining fresh documents, should be referred
to the Regional Authority for necessary guidance. Along with the letter of reference, a copy
of the last search report taken from the records of the Registrar of Companies should be
sent to the Regional Authority.
3. In case of secured advances (mortgages) the following procedure should be followed:

a) A letter of acknowledgment of debt should be obtained every two years from the date of
documents on hand.
b) As the period of limitation for mortgage is 12 years, the branch should obtain only a letter of
acknowledgment of debt for about ten years, at the end of which each such case should be
referred to the Zonal Legal Department through the Regional Authority for further advice.
4. In case of Bills Purchase/ Discounting facility (Inland/Foreign) fresh B.P. Undertaking letter
should be obtained every two years from the date of existing documents.
5. In all letters of acknowledgment of debt subsequent to the first one (relating to the same
set of documents) reference to all the previous letters of acknowledgment of debt should be
made in addition to the reference to the documents.
6. Signatures of each of the borrowers and guarantors to an advance should be obtained on

the letter of acknowledgment of debt, on separate revenue stamps of appropriate value in
case revenue stamp is affixed.
7. In respect of advance account wherein a letter of guarantee is obtained, same letter of

acknowledgment of debt should be got signed by the principal borrower/s as well as by the
guarantor/s.
8. In case of change in the constitution of a borrower's firm, fresh sanction and documents
should be obtained and a fresh account should be opened.
9. When the limit in an existing account is subsequently increased, supplemental set of

documents should be obtained for the amount by which the limit is enhanced.
For example, if a limit is increased from Rs.1 lakh to 2 lakhs or from Rs. 5 lakhs to Rs. 10
lakhs, the supplemental set of documents to be taken will be for Rs. 1 lakhs and Rs.5 lakhs
respectively.
As regards obtaining of the renewal documents in such cases, the renewal documents
should be taken for entire limit (including the enhanced limit).
10. If security by way of pledge/ hypothecation/ mortgage/ to secure a facility by way of loan or
overdraft or cash credit has already been created and the same is to be either extended for
enhanced limit or otherwise a fresh additional advance is to be made, then the documents
required to be obtained in such a case will be full set of documents as may be appropriate to
the type of advance and the amount of the facility in the document should be limited to the
extended or a fresh additional advances, as the case may be.
11. Memorandum of Entry made in connection with mortgages by deposit of title deeds should
not be renewed, as otherwise any mortgage / charge or lien created in the meantime would
take priority over the Bank's mortgage / charge and lien. However, a letter of
acknowledgment of debt should be obtained in standard form.
12. It should be carefully seen that the advance documents do not become time-barred due to
omission to obtain in time renewal documents, confirmation/ revival letters or letters of
acknowledgment of debt from the borrowers/guarantors.
13. Usual debit balance confirmation letters should invariably be obtained every half-year.
 CHARGES REQUIRING REGISTRATION WITH THE REGISTRAR OF COMPANIES

UNDER SECTION 77 OF COMPANIES ACT, 2013
In the case of all companies including private limited companies, certain charges on the assets have
compulsorily to be registered with the Registrar of Companies under Section 77 OF COMPANIES
ACT, 2013. The charges which require compulsory registration are given hereunder.
1) A charge for the purpose of securing any issue of debentures.

2) A charge on uncalled share capital of the company.
3) A charge on any immovable property, wherever situate, or any interest therein. (This will
include all types of mortgages)
4) A charge on any book debts of the company.
5) A charge, not being a pledge, on any movable property of the company. (e.g. a
hypothecation)
6) A floating charge on the undertaking or any property of the company including stock-in-
trade.
7) A charge on calls made but not paid.
8) A charge on a ship or any share in a ship.
9) A charge on goodwill, on a patent or license under a patent, on a trade mark, or on a
copyright or a license under a copyright.
In terms of Section 79 of the Companies Act, wheneverthe terms and conditions, or the extent or
operation of any charge registered as aforesaid are modified, particulars of such modifications are
also required to be registered with the Registrar of Companies.Modification of such charges may be
by way of enhancement in limits or fresh advances granted against the same security or obtaining
of additional securities for the existing or enhanced limits or any other modification in the terms and
conditions of advance like revision in rate of interest other than change in base rate of the Bank,
arrangement for sharing of securities with other creditors, change in the ranking etc.
It should be noted that the charge has to be filed for registration within 30 days of its creation i.e.
from the date of execution of document, if any. In case it is not so filed within the stipulated period,
the Registrar has the discretion to extend the period by a maximum of thirty days if sufficient cause
is shown. No prudent banker would, however, depend on the discretionary powers of the Registrar
which may or may not be exercised in his favor.
Periodic “Legal Audit” of Title Documents & Other related loan documents in respect of large value
loan accounts having exposure of INR 5.00 Crore and above:
In response to RBI guidelines to arrange re-verification of title deeds with relevant authorities and
periodical legal audit of title deeds and other relevant documents ,our Bank has introduced a
system of Periodic “Legal Audit” of Title deed & other loan documents in respect of all credit
exposure of Rs 5.00 Crore and above, where our Bank is:-
1. Sole Banker or Leader of Consortium/Joint Lending Arrangement
2. In case our Bank is a member of the Consortium/Joint Lending Arrangements, branches have to
obtain confirmation from the leader Bank, with regard to compliance of guidelines issued by RBI
The guidelines will be applicable to new as well as existing accounts.Modalities for such
verifications:
1. a) In accordance with the existing practice: “Non-Encumbrance Certificate (NEC/Title Opinion

Report” with other related documents in this regard on the property to be mortgaged are obtained
before disbursement at the time of fresh sanction from empanelled advocate of the Bank.
The documents are then vetted by legal departments of the respective Region/Zone.
b) In addition to this existing practice, re-verification of title deed as to their genuineness with
relevant authorities along with verification of other loan documents: will be carried out within a
period of –five years- from the date of such first verification of title deeds/documents, and for every
block of –five years- thereafter till the loan is settled in full.
2. a) The branches should arrange to obtain (through empanelled advocates of the Bank) certified
copies of the documents/title deeds from office of “Sub-Registrar of Assurance”. The advocate will
compare the certified copy and the original Title Deed
b) Thereafter, the Advocate should submit a report that he has compared both and the title deed
deposited with the Bank at the time of creating the mortgage are genuine. The branch should
ensure safe keeping of both the certified copy and the original title deed.
Note: Branches located in “Southern States” i.e A.P, Karnataka, Kerala and Tamil Nadu
should note to obtain NEC from the concerned Sub-Registrar of Assurance.
3. The re-verification will be carried out by the Bank’s empanelled Advocate.
4. The responsibility of re-verification of the title deeds will be assigned to different advocate at
different times (i.e. on rotational basis) so as to ensure that the same advocate is not assigned the
job of re-verification of “Title Deeds” which he has done earlier.
Branches in Rural/Semi Urban areas may carry out verification through same advocate,
with permission of respective Regional Offices (In case adequate number of empanelled
advocates is not available)
5. The fee structure for re-verification of title deeds and other documents by the empanelled
advocates will be as per the existing fee structure advised by the Legal Department, BCC/other
Competent Authorities from time to time.
6. This periodical verification will be in addition to our existing practice of verification of Title Deeds
and other related documents at the time of fresh sanction/disbursements.
7. Zones are required to report the progress on quarterly basis to Corporate Office with the
following specific information:-
-Number of loan account due for review under Legal Audit during the quarter
-Number of accounts where Legal Audit is concluded.
-List of deficiencies pointed out by the Advocate
-Steps taken to rectify deficiencies
(Refer BCC: BR; 105:537 dated 05.12.2013)
Sharing of KYC Documents by Bank in Fraud cases:(HO:BR:106/92 dated 06.05.2014)

In case of the incidence of frauds, the paying banks require KYC documents of the customer/s of
the collecting banks for lodging FIR with the police/investigating authorities to trace
beneficiary/fraudster and recovery of the amount.
The IBA has now advised the member banks to share the copies of KYC documents of the
customer/s( retaining the original documents with them) to facilitate the paying bank to lodge FIR
with the police and to keep the RBI informed in case of incidence of fraud.
%%%%%%%%%
Test your understanding
1. "Documentation" means obtaining of RELEVANT documents as per terms of sanction for

______________on security/ies
a. Enforcement
b. creation of charge
c. unfettered rights
d. Filing of suit
e. Obtaining decree
2. Where a document is executed by an illiterate or by a person not knowing the language in which
the document is written/printed, ___________________should be obtained duly signed by a person
conversant with English language as well as the language of the executant and also known to the
Bank.
a. letter as per LDOC-53 (Letter of Attestation)
b. Letter of acknowledged of debt(LDOC 59)
c. Resolution as per LDOC 75
d. Letter of undertaking(LDOC 136)
e. Declaration
3. The executants should sign invariably on.

a. Each page of document
b. On 1st & last page of document
c. Only on last page of the document
d. On 1st page of document
e. Both side of each page of document
4. All documents should state the date, month and year of execution for…………………..
a. Determining the validity of documents
b. Determining the period of limitation
c. Determining the age of the loan
d. Determine the repayment period of the loan.
e. Both a & B
5. Document must mention place of execution…………………………………..
a. for determining the jurisdiction of courts in case of disputes
b. For creation of charge over securities
c. For purpose of payment of tax on property mortgaged
d. For Sale of security in case of default.
e. As per requirement of law
6. Advance accounts with aggregate limit of above Rs. 2.00 crores (Funded+Non-Funded) would be
verified by the
a. Empanelled advocate of Bank

b. Chief Manager in charge of Advance dept in RO/ZO
c. Bank’s Law officer posted in the respective Zone/Region
d. Any officer holding Power of Attorney
e. Any executive of our bank
7. The document relating to Advance accounts with aggregate limit of Rs. 10.00 lacs and above but
up to the inclusive of Rs. 2.00 crore shall be verified by
a. The banks’s identified advocate/Lawer other then the one who has given the Title Opinion/non-
encumberence Certificate.
b. The banks’s identified advocate/Lawer , who has given the Title Opinion/non-encumberence
Certificate.
c. Bank,s Law officer posted in the respective Zone/Region
d. POA holder officer of our bank, not below the rank of chief manager.
e. Any executive of our bank.
8. Title deeds mean the documents relating to the property and which are____________of title.
a. Proof of ownership
b. material evidence
c. Statement of ownership
d. Registered record
e. Legal requirement
9. A mortgage is a _______________in a specific immovable property.
a. Creation of charge
b. transfer of interest
c. Transfer of ownership
d. Transfer of right
e. Transfer of value
10. A letter of acknowledgment of debt shall be signed by__________.
a) The Active partners/Managing Director

b) The authorised agent of the principal debtors
c) All the borrowers/gurantors who have signed the original docs
d) The attorney of the borrowers.
e) Agent of the borrower
11. As the period of limitation for mortgage is ……………… years.

a) 3
b) 9
c) 12
d) 18
e) No such limitation
12. Debit balance confirmation letters should invariably be obtained ………...
a) Half yearly
b) Annually
c) Once in 3 years
d) Quarterly
e) Monthly
Answer Key:
1 2 3 4 5 6 7 8 9 10
b a a e a c a b b c
11 12
c a
State true or false
Sr No Statement T/F
1 In respect of advance accounts with limit of Rs1.00 crore and above, Branch
Head alongwith Joint Managers/ Officer In-Charge of credit department have to
confirm that they have gone through the complete NEC/ Title Clearance Report
2 Periodic “Legal Audit” of Title Documents & Other related loan documents in respect
of large value loan accounts having exposure of INR 5.00 Crore and above is to be
done
3 The third party mortgage can only be from a guarantor
4 Whenever a Confirmation Letter is obtained, it should be on the same date
5 Period of limitation for mortgage is 12 years
6 Charge has to be filed for registration within 30 days of its creation i.e. from the
date of execution of document
7 Letter of acknowledgment of debt should be got signed by the principal borrower/s
only.
8 In case of change in the constitution of a borrower's firm, fresh sanction and
documents should be obtained and a fresh account should be opened
1 2 3 4 5 6 7 8
True True True False True True False True
13. CHARGING OF SECURITIES
Quick bites: This chapter deals with The charge on the Security offered, depending
on the nature of the security, is created by way of Pledge, Hypothecation, Mortgage,
Assignment etc., subject to registration with competent authorities wherever
mandatory under the law.
 VARIOUS TYPES OF SECURITIES:

Before going to the topic – Charging of Securities, let us understand the types of securities we deal
with – (1) Primary Security (2) Collateral Security.
The assets created by the borrower from the credit facilities granted by the bank form the primary
security for the bank advance as a matter of rule. The bank invariably obtains a charge over those
assets. Similarly, other assets on which the advance is primarily based even if it is not created from
the credit facilities granted by the bank will also be taken as primary security.
In some cases where primary security is not considered adequate or the charge on the security is
open the bank may insist on an additional security to collaterally secure advances granted by it.
Such securities are termed as collateral securities. Collateral security may either be tangible or third
party guarantees may also be accepted.
 BASIC CHARACTERISTICS OF SECURITIES

The securities acceptable to banks either as primary or collateral must have certain, basic
characteristics as under:
 Ascertainment of value: A security will be considered good and will be acceptable to the
bank only if its value can be ascertained with a definite degree of correctness. Certain
articles may be valuable but may not be accepted as security if the value cannot be
ascertained such as paintings/antiques etc.
 Marketability: A good security must have a ready market. Raw materials, articles of
necessity, other primary commodities are easily marketable and are considered good
security. Semi-finished goods may be more valuable than raw material for the borrower but
may not be marketable at all and will thus be considered inferior to raw material in as much
as its acceptance as a security is concerned.
 Stability in value: A good security should have a stable value over a long period. If the value
of a security fluctuates violently over a short period, it may not be considered a good
security and may be accepted by the bank only after keeping a very high margin.
 Ascertainment of title and transferability: An asset can be accepted as security by the bank
only when the title over that asset can be ascertained. Furthermore, the title should be
easily transferable. The purpose of obtaining a security is to apply the sale proceeds of the
security if the customer fails to repay the advance. But if the security is not easily
transferable the very purpose of obtaining a security may be defeated. Immovable property
located at a prime location may be very stable in value has a ready market and the value
can also be ascertained but may still not be considered as a good security due to difficulty in
ascertaining the title and elaborate legal process involved for effecting its sale through a
court of law.
 Durability: The security accepted by the Bank must be durable. No bank advance is granted
against perishable commodities.
 Other Characteristics:
- In case loan or advances to Muslims offering their property as primary or collateral security,
it should be ensured, before accepting property as security that such property has not been
alienated under the Muslim Law like 'waqf-ul-ulad' and/or 'Haq-rnehr' in favour of their wives
or for the benefit of their heirs since it will jeopardise the interest of the banker as lender.
- There are circumstances when securities given to the bank as security to cover the loan,
have become void as against income tax dues/arrears of land revenues. To avoid such an
unpleasant situation, the borrower should be asked to furnish income tax clearance
certificate/clearance from local authorities.
- There are few other characteristics such as controllability of an asset as a security and
securities having a yield which will enhance their value etc. which are critically analysed by
the bank while accepting any security.
 CONCEPT OF MARGIN
The percentage of margin which is kept by the bank as a cushion for any unforeseen drop in the
value of security is directly linked to various characteristic as discussed above. Lower margin may
be prescribed for those securities which have a stable value and easy marketability whereas higher
margins are prescribed for those securities where fluctuations are wide. Margin fixed on raw
material may be lower as compared to margin on stocks-in-process as the marketability has been
affected in the latter case.
The fixation of margin may also depend on the credit worthiness of the borrower and in some cases
even Reserve Bank may issue directives to the banks.
 Fixed assets:
Assets like land & building, plant & machinery, which are called fixed assets, are taken as security
by the bank. Bank finances the borrowers to acquire these fixed assets and takes such acquired
assets as primary security or it can grant working capital limits against stocks/debtors as primary
security and take fixed assets acquired by the company as collateral security.
 Current assets:
 Stocks: Stocks are generally goods in trade. A manufacturing unit purchases raw material
processes it and produces final product. In this process, stocks of raw material, semi-
finished goods, and finished products are lying with the unit. These stocks are offered as
security for the working capital limits. In case of manufacturing unit besides the security of
raw material, work-in-process, finished goods, security of stores and spares, packing
material and goods in transit can also be accepted.
 Debtors/Book-debts/Receivables:
Any trading/manufacturing concern in its business will have to sell some of its products on credit to
its customers. In this process debtors are created. Funds of the company get locked up in these
unrealised debtors and its cash flow gets affected. However, these trade debtors are current assets
and could be taken as security. Bank lends against the security of debtors by way of cash credit
(hypothecation) against book debts. When the company draws and holds bills of exchange, it can
offer these bills with or without title to goods to the bank as security and bank can finance by way
of bills purchase (in case of demand bills) and bill discounting (in case of usance bills).
 Bank's own deposits:
Bank grants credit to its customers against its own time deposits. Demand loan/overdraft facilities
can be sanctioned to the depositors holding short/fixed/recurring deposits and other types of term
deposits by following Bank's usual norms.
The advance can also be granted in exceptional cases against security of third party deposit.
However, no advance can be sanctioned against deposit held at another branch even in case of the
depositor himself.
 Other types of securities:

Bank finances against various other types of securities in the nature of movable assets like
government bonds, postal / national saving certificates, shares & debentures of the companies,
units of Unit Trust of India and other mutual funds, LIC policies, public sector undertakings' bonds
or gold/silver and jewelry. Loan facilities are granted against these types of securities, which are
covered separately.
 METHODS OF CHARGING OF SECURITIES:

Charging of securities means to create coverage over the security – which will be like a cushion to
ensure the repayment by the borrower in usual course and through legal recourse, if necessary.
Selection of security should be appropriate depending upon the type of credit facility, type of
borrower and purpose. Once the appropriate security is selected, bank's charge on the security
should be ensured by observing necessary formalities, so that in case of default by a borrower, the
security will be available to the bank to recover its dues.
The important six methods of charging of securities are given below with brief explanation.
 Pledge:
Section 172 of the Indian Contract Act, 1872 defines 'Pledge' as 'the bailment of goods as security
for payment of debt or performance of a promise is called 'pledge'. The bailor is, in this case, called
the 'pledger' and the bailee is called the 'pledgee'.
Above definition reveals that: Pledge means bailment of goods, its purpose is to secure payment of
a debt or to secure performance of a promise. Any movable property can be pledged. Delivery
(actual or constructive) is necessary to complete a pledge. In case of Bank's advance against the
pledge of goods, customer is called the 'pledger' and the bank is called the 'pledgee'. Where
pledged securities or goods are indivisible, the pledgee can sell the securities or goods only to that
extent by which the loan amount will be satisfied.
 Hypothecation:
The term 'hypothecation' is described as "Charge against property for an amount of debt where
neither ownership nor possession is passed on to the creditor." Hypothecation is defined in
SARFAESI Act, 2002.
In case of pledge, the borrower's goods are placed in the bank's possession under its own locks
whereas in case of hypothecation, goods remain in the possession of the borrower.
If the borrower fails to liquidate the advance granted to him against hypothecated goods, under
agreement, he has to give the possession of the goods to hypothecatee (bank). At this stage,
hypothecation converts into pledge and the banker as hypothecatee enjoys the powers and rights
of a pledgee.
On borrower's default in repayment of advance, if the banker prefers to file a civil suit, it is held
that the banker ranks as an unsecured creditor, at par with other unsecured creditors, of the
borrower. Hence, by creating the charge of Hypothecation, banker can have direct and first
charge/claim over the goods hypothecated to him.
 Mortgage:
It is the transfer of an interest in specific immovable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an existing or future debt or the
performance of the agreement which may lead to a pecuniary liability. The borrower is called the
'mortgagor' and the lender the 'mortgagee'.
- Forms of mortgage: As per Sec. 58 of the Transfer of Property Act, there are six types of
mortgages:
(1)Simple mortgage
(2) Mortgage by conditional sale
(3) Usufructuary mortgage
(4) English mortgage
(5)Anomalous mortgage
(6) Mortgage by deposit of title deeds/ equitable mortgage
Generally only two types of the mortgage are preferable by the banks
- Simple Mortgage; according to section 58 (b) of the Transfer of Property Act, a simple
mortgage is a transaction whereby without delivering the possession of the mortgaged
property, the mortgagor binds himself personally to pay the mortgage money and agrees,
expressly or impliedly, that in case of default the mortgagee shall have a right to cause the
mortgage property to be sold by a decree of the court.
- Equitable mortgage or Mortgage by deposit of title deeds:

According to section 58(f) of Transfer of Property Act, where a person delivers the documents of
title to the immovable property to the creditors with an intention to create a security thereon, the
transaction is called equitable mortgage.
The essential features of the equitable mortgage are as under:
 Delivery of the documents title to the immovable property to the creditor

 Intention of the mortgagor to create a security thereon in favour of the creditor.
 The delivery of the title deeds must be by the owner of the property or his / her authorized
agent only.
 The owner of the property must be either our borrower or a guarantor.
 Mortgage to be created in our usual memorandum for equitable mortgage as given in Book
of Instruction Vol 9
 Proper records of the title deeds deposited must be recorded in the mortgage register with
serial number.
 Photo/s of the person who is/are depositing the title deeds should be on records duly signed
by him/them
 A registered letter to be sent to the mortgagor mentioning the fact that he/she attended the
office on a particular date for depositing the title deeds as security against the credit
facility/ies and acknowledgement thereof to be kept with the memorandum of the equitable
mortgage
 CERSAI
Central Registry of Securitization Asset Reconstruction and Security Interest
(CERSAI) is a central online security interest registry of India.
 It was primarily created to check frauds in lending against equitable mortgages.
 The decision to form a central registry of equitable mortgages was revealed in the 2011
budget speech by then Finance Minister. It was formed under the Chapter IV Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI Act). It was registered as a government-licensed company, under the Section 25
of the Companies Act, 1956. CERSAI become operational on 31 March 2011.
 The Registration would be applicable to transactions of security interest over property
created to secure loans and advances from the banks and financial institutions as defined
under the SARFAESI Act.
 The Company is providing the platform for filing registrations of transactions of
securitization, asset reconstruction and security interest by the banks and financial
institutions.
 As per the existing guidelines Secured creditors are required to file all the particulars relating
to the transactions (creation, modification and satisfaction of equitable mortgage,
securitization and reconstruction and factoring transactions) with Central Registry within a
period of 30 days.
 While the Registrar of Central Registry has the discretion to permit registration of charges
which are filed beyond 30 days but up to 60 days from the date of the transaction, subject
to payment of such late fee as he may decide, the registrations with a delay of more than
60 days can be done only after the delay is condoned by the Central Govt. in terms of Sec
26(A) of SARFAESI Act.
 Fur
ther on 22-01-2016 Government of India has amended the rules under Securitization and
Reconstruction of Financial Assets and Enforcements of Security Interests (Central Registry)
Rules, 2011. Now the following types of Security interest are also required to be filed on the
CERSAI Portal:
1. Particulars of creation, modification or satisfaction of security interest in immovable
property by mortgage other than mortgage by deposit of title deeds.
2. Particulars of creation, modification or satisfaction of security interest in
hypothecation of plant and machinery, stocks, debt including book debt or
receivables.
3. Particulars of creation, modification or satisfaction of security interest in intangibles
assets, being knowhow, patent, copyright, trade mark, license, franchise or any
other business or commercial right of similar nature.
4. Particulars of creation, modification or satisfaction of security interest in any under
construction residential or commercial building or a part thereof by an agreement or
instrument other than by mortgage.
 Now, CERSAI has decided to first start the registration of records pertaining to movable and
intangible assets w.e.f. 25.5.2016. The filing of records for security interest in any under
construction residential or commercial building or a part thereof by an agreement or
instrument other than by mortgage will be started at a later date and will be advised
accordingly.
 User creation and its authority in Finacle & CERSAI Portal:
a. New Procedure through CERSAI Portal:

W.e.f. 01.10.2017, Branches/ Offices are required to carry out charge creation, modification and
satisfaction through the CERSAI Portal and follow up for timely verification of such transactions by
Multifunctional Checker.
b. Users on the CERSAI portal (other than CBS)
I. Primary User Administrators:
At the Corporate Office Level -2- Primary User Administrators are created by the CERSAI. These
Users should have the digital signatures.
II. Secondary User Administrators:
Two Executives/ Officers at Regional Offices having Digital Signature to be identified as CERSAI
Secondary User Administrators. Officers being identified for this purpose should continue in the
Regional Office for a period of at least -1- year, to have the continuity in the process. The
identified Officers (as Secondary User Administrators) have to submit their duly filled in applications
(application forms enclosed in this manual/ also provided in downloads on the CERSAI portal) to the
Primary User Administrators at Retail Banking Department, BCC, Mumbai for creation of CERSAI
User Id.
III. Multi functional Users (Maker/ Checker)
Regional Offices / Branches have to identify Officers as Multifunctional Maker & Checker Users at
Branch level.
Multifunctional Maker: Multifunctional Maker User does not require Digital Signature to login and as
such at least -1-Multifunctional Maker User per branch can be created who will carry out registration
/ modification of charge due to increase in limits, correction in charge created on movable and
immovable assets, satisfaction of charge on closure of the account besides conducting search on
charges on properties. The data submitted by the Multifunctional Maker User is required to be
verified by Multifunctional Checker User.
Multifunctional Checker: The identification of Multifunctional checker users has to be based on the
requirement of the Regions/Branches so that they can cater to the records entered by
Multifunctional maker user at Branch level (e.g. One Checker User can be allotted a Cluster of
branches where there are few accounts for charge registration.) Digital signature is required to
login as a multifunctional Checker User as such Executives / Officers holding existing Digital
Signature should be considered for Multifunctional Checker User Role on priority.
All the CERSAI USERS should invariably give their e-mail address (legibly) and Mobile number in
their applications, as CERSAI will send the User ID and Password to their e-mail address.
 For issuance of Digital Signature, an application recommended and submitted by the
Regional Offices through their Zonal Officetobe sent to Asst.General Manager, IT & Projects
Dept., Baroda Sun Tower, Mumbai.
CERSAI has started to charge additional fee effective from 01.12.2014 in a staggered manner till
60th day (as shown in the table) of creation/extension of mortgage.
For registrations which are filed beyond 60 days from the date of mortgage/extension, CERSAI will
not be accepting the same unless the Secured creditor has got the delay condoned from the Central
Government for filing of particulars of transaction for registration or modification or satisfaction of
security interest/ Securitization after payment of additional fee as applicable for delay beyond 60
days.
 Fee Structure: As per details given in circular No. BCC: BR: 107: 337 dated 10 .07.2015;
BCC/BR/108/lt7 15.03,2016.
Branches are required to ensure registering charges through CERSAI menu in CBS for all the fresh
registrations immediately and not more than 10 days from the date of creation of mortgage and
should monitor till successful registration.
Our Bank has made available the following two menu in FINACLE which can be used for monitoring
of registration of charges:
I. CERSREP
II. CERSAIRP
Please note the status of registration can be monitored with the above two menu only if the
registration data of the security interest has been filed through CERSAI Menu in FINACLE.
In Case of rejection on any record, the particulars are to be entered and verified on CERSAI portal
(https://www.cersai.org.in) by the branches and should not be delayed so that payment of
additional fees to CERSAI on account of delay may be avoided.
Similarly Branches should take due care in registration of modifications / satisfaction of charge on
CERSAI portal (https://www.cersai.org.in) immediately upon such modification (extension / charge)
and satisfaction of the mortgage.
 Assignment
Assignment means transfer of a right of an actionable claim, existing or future. 'Actionable claim'
means a claim to any debt, other than a debt secured by mortgage of immovable property, by
hypothecation or pledge of movable property, or to any beneficial interest in movable property in
possession, either actual or constructive, of the claimant, which the Civil Courts recognise as
affording grounds for relief, whether such debt or beneficial interest be existent, accruing,
conditional or contingent.
Section 130 describes the manner in which actionable claims can be transferred, as follows:
The transfer of an actionable claim, whether with or without consideration, shall be effected only by
the execution of an instrument in writing signed by the transfer or his duly authorised agent, shall
be complete and effectual upon the execution of such instrument, and thereupon all the rights and
remedies of the transfer, whether by way of damages or otherwise shall vest in the transferee,
whether such notice of the transfer is hereinafter provided be given or not.
 Lien:
Lien is the right of a creditor to retain in his possession the goods and securities owned by the
debtor until the debt has been discharged, but has no right to sell the goods and securities so
retained. Lien is of two types, particular and general.
 Banker's right of lien:
Banker has a right of general lien against his borrowers. Section 171 of the Indian Contract Act,
1872 confers the right of general lien on the bankers as "Banker may, in the absence of a contract
to the contrary, retain as a security for a general balance of account, any goods bailed to them."
Bank's right of general lien includes Right of sale. Therefore, it is said that banker's lien tantamount
to an implied pledge.
The banker's right of lien is not barred by law of limitation. The Limitation Act only bars the remedy
and does not discharge debt. As such, banker has a right of lien against time barred debt also.
When banker exercises this right, property of goods remains with owner even though the same is in
possession with the bank.
 Negative Lien
The borrower may sometime be having non-encumbered assets which are not charged to the bank
as security. The borrower is thus free to deal with these assets and may even sell them if he so
desires. To restrict this right of the borrower, bank may request him to give an undertaking to the
effect that he will neither create any encumbrance on these assets nor sell them without due
permission from the bank so long as the advance continues. This type of an undertaking obtained
by the bank is known as 'Negative Lien'. Negative lien is in the form of a personal assurance or
undertaking which has binding effect but confers no right on the bank to proceed against the
property itself and thus creates no encumbrance or charge on the property.
 Right of set-off:
Right to apply the credit balance in customer's account towards liquidation of debit balance in
another account of the customer provided both the accounts are maintained by him in the same
capacity.
The right of set-off is a statutory right which enables bank to combine several accounts of a
customer in his own right unless there is any agreement expressed or implied to the contrary.
Before exercising the right of set-off a reasonable notice should be given to a customer to avoid
dishonouring of cheques drawn by the customer being unaware of the situation. Though the right
of set-off is available to a banker as a legal right, banks take letter of set-off from customer. It
helps the bank to overcome future legal complications and it dispenses with the need for notice.
The right of set off can be applied by the bank only if the following conditions are met:
(a)The liability of the borrower is for a sum which is certain.

(b)The repayment of debt is due.
(c)Both the accounts are held by the customer in the same capacity.
TEST YOUR UNDERSTANDING
1) The assets created by the borrower from the credit facilities granted by the bank form the
________________
a. Fixed security
b. Floating security
c. Collateral Security
d. Primary Security
e. Encumbered security
2. Lower margin may be prescribed for those securities which have a

a. Fluctuating value
b. Stable value
c. Difficult to realise
d. High value
e. Proper value
3. Higher margins are prescribed for those securities which are :
a. Wide fluctuations in value.

b. Less Liquid
c. Intangible
d. Tangible
e. Highly liquid
4. Advance ____________ sanctioned against deposit held at another branch by depositor himself.
a. Can be
b. Can not be
c. By permission of next higher authority
d. By permission of BCC
e. At the discretion of Branch head
5. Stocks & Book debts are

a. Fixed assets
b. Current assets
c. Current liabilities
d. Non-Current assets
e. Intangible assets
6. Postal / National saving certificates, shares & debentures of the companies, units of Unit Trust of
India and other mutual funds can be________ as security.
a. Hypothecated
b. Pledged
c. Lien
d. Mortgaged
e. Assignment
7. ___________of goods as security for payment of debt or performance of a promise is called
'pledge'.
a. Safe custody
b. bailment
c. Lien
d. Hypothecation
e. Assignment
8. __________' is described as "Charge against property for an amount of debt where neither
ownership nor possession is passed on to the creditor.
a. Assignment
b. Mortgage
c. Hypothecation
d. Lien
e. Pledge
9. In case of hypothecation, goods remain in the possession of the __________
a. Guarantor
b. Surety
c. Bank
d. Trustee
e. borrower
10. The essential features of the equitable mortgage are as under:
a. Delivery of the Original documents title to the immovable property to the creditor
b. Delivery of certified copies of the documents of immovable property to the creditor.
c. Delivery of Land Revenue receipt alongwith Xerox copies of deed
d. Mere intension to create mortgage in favour of creditor.
e. To execute POA in favour of secured creditor
11. Assignment means transfer of a right of an________, existing or future.

a. Any claim
b. Actionable claim
c. Admitted claim
d. Actual claim
e. Reasonable
12. ________ is the right of a creditor to retain in his possession the goods and securities owned by
the debtor until the debt has been discharged.
a. Lien
b. Bailment
c. Agency arrangement
d. Power of attorney
e. Pledge
13. Banker has a right of _______lien against his borrowers.
a. Special
b. Specific
c. General
d. Common
e. particular
14. The banker's right of lien is not barred by law of__________.

a. Contract
b. Limitation
c. Banking Regulation Act
d. RBI act
e. Stamp Act
15. Right to apply the credit balance in customer's account towards liquidation of debit balance in
another account of the customer provided both the accounts are maintained by him in the same
capacity.
a. Right of Liquidation
b. Right of set off
c. Right of appropriation
d. Right of adjustment
e. Right of takeover
16. The right of set off can be applied by the bank only if the following conditions are met except:
a. The liability of the borrower is for a sum which is certain.

b. The repayment of debt is due.
c. Both the accounts are held by the customer in the same capacity.
d. In case of death of the borrower
e. In case where borrower is not repaying the debt inspite of due notices
17. Undertaking to the effect that the borrower will neither create any encumbrance on these
assets nor sell them without due permission from the bank so long as the advance continues
…………………….
a. Positive lien
b. Neutral lien
c. Negative lien
d. General Lien
e. Particular lien
18. CERSAI stands for “Central Registry of ___________Asset Restriction & Security Interest of
India”.
a. Securitization
b. Secured
c. Security
d. Securable
e. Sensitive
19. The mortgages created by way of deposit of title deeds are to be registered with the (CERSAI)
within _______ days from the date of creation of the mortgage
a. 7 days
b. 15 days
c. 30 days
d. 60 days
e. 90 days
20. Which one of the following is not a proper mode of charging of securities
a. Hypothecation
b. Pledge
c. Assignment
d. Lien
e. Registration
ANSWER KEY
1 2 3 4 5 6 7 8 9 10
d b a b b b b c e a
11 12 13 14 15 16 17 18 19 20
b a c b b d c a c e
14. CREDIT RATING
Quick Bites:
 Introduction & Applicability of Credit Rating
 Rating/Credit Scoring Model in our Bank
 Applications of Credit Rating
 Bank of Baroda Risk Assessment Module (BOBRAM)
 External Credit Rating
 INTRODUCTION TO CREDIT RISK

Credit risk associated with a credit exposure should be defined as the risk of losses arising from a
credit exposure turning adverse i.e. defaulting or moving towards distress, due to inability or
unwillingness of the borrower to repay. However, for the purpose of this policy, we define credit
risk as the risk of an obligor defaulting on his obligation towards the bank. A default is considered
to have occurred with regard to a particular obligor when either or both of the two following events
have taken place:
 The bank considers that the obligor is unlikely to pay its credit obligations to the banking
group in full, without recourse by the bank to actions such as realizing security (if held).
 The obligor is past due more than 90 days (or internal threshold in terms of number of days
past due, as defined by the bank) on any material credit obligation to the banking group.
Overdrafts will be considered to be past due once the customer has breached an advised
limit or been advised of a limit smaller than current outstanding.
The elements to be taken as indicators of unlikelihood to pay include:
 The bank puts the credit obligation on non-accrued status

 The bank makes a charge-off or account-specific provision resulting from a significant
perceived decline in credit quality subsequent to the bank taking on the exposure
 The bank sells the credit obligation at a material credit-related economic loss
 The bank consents to a distressed restructuring of the credit obligation where this is likely to
result in a diminished financial obligation caused by the material forgiveness, or
postponement of principal, interest or (where relevant) fees
 The bank has filed for the obligor’s bankruptcy or a similar order in respect of the obligor’s
credit obligation to the banking group
 The obligor has sought or has been placed in bankruptcy or similar protection where this
would avoid or delay repayment of the credit obligation to the banking group
 APPLICABILITY OF RATING:
Credit Risk Rating is a method of systematically classifying credit proposals according to their
quality and inherent risk characteristics. Rating is an important single-point indicator of credit
quality to the Bank as also to outsiders (viz. regulators, analysts, auditors, etc.). All credit proposals
would need to be rated in an internal credit rating model except for under mentioned i.e. Rating
Exception
1. MSME proposals up to Rs. 2 Crore, which need to be rated in MSME scoring model
2. Product specific proposals to be rated in respective product scoring models
3. Retail products to be rated in LAPS using Retail credit scoring model
4. Proposals for Bill Discounted under Letter of Credit and assistance backed by SBLC/BG on
standalone basis, where the rating of the respective banks may be used;
5. Portfolio acquired under Interbank Participation Certificate (IBPC) on risk sharing basis;
6. Exposure to foreign banks, where the external rating of the respective banks may be used;
7. Proposals backed by 100% cash collateral.
8. Borrowers availing Loan against Banks own Deposit (LABOD) Facility
9. Exposures to Urban Municipal Bodies (on account of non-availability of financial results) who
can generate revenue through taxation
10. Facility having 100% Central or State Government guarantee
11. Home country sovereign
12. Foreign country sovereign (External rating is used)
13. Accounts turned NPA, after the date of NPA
14. Advances to Central/State Govt. Departments. Undertaking/ Establishments, which are not
running on commercial basis (e.g. Industrial/Agricultural/Rural Development Boards of
various State Govts.). An organization may be treated as not running on commercial basis if
the borrower is not required to draw Profit & Loss A/c (including income & expenditure) and
Balance sheet (statement of affairs) under the law.
15. Borrowers who are availing only those loans/limits where full powers have been granted as
per loaning power chart e.g. purchase of cheques drawn by Central & State Governments
and drafts of public sector banks, ILCs/FLCs where full cover is held by way of deposits till
maturity, etc.
16. Advances against clearing instruments/ bills/ clean overdrafts permitted within the vested
loaning powers at various levels where the client is not availing any other loan/limit for
which risk rating is applicable as per guidelines.
The exemption from risk rating under (15) and (16) shall be subject to the condition that the
loan/limit allowed is for a short period and is for a specific transaction. The exemption from rating
should be exercised only in exceptional circumstances and wherever possible, credit risk rating in
appropriate rating model be conducted. In case the borrower is availing any other limit, risk rating
as per guidelines shall be applicable.
As per RBI guidelines, all credit exposures need to be rated. However in case, models for rating of
any kind of exposure to be taken up are not available, the exposure may be considered as unrated.
While taking up such unrated exposure bank's extant guidelines including financial, non-financial
parameters etc. are to be followed.
 RATING/ CREDIT SCORING MODEL IN OUR BANK
Bank has implemented Risk Rating Models (AAIPL) w.e.f. 01/01/2004, further Bank has decided to
gradually replace the existing models with Basel- II compliant Models from M/s CRISIL w.e.f. from
01.10.2006 initially for the commercial advances accounts having exposure of above Rs. 5 Crore
only, later w.e.f. from 10.02.2007 this limit was reduced to Rs. 25 lacs and above.
 Model for Corporate entities, BOBRAM

 Model for MSME rating having exposure of Rs. 2 Lacs and above and upto Rs. 2 Crore
 All retail exposures hosted on LAPS [HL (For Housing Loans , EL (For Education Loan), SL
(For Secured Loan), CL ( For Clean Loan), BTL (For credit facilities under Baroda Traders
Loan up to Rs. 200 Lacs)]
 APPLICATIONS OF CREDIT RATING
Importance and applicability of Credit Rating in banking system as mentioned in circular no.
BCC:BR:102:198 dated 22-07-2010 and further in our Domestic Loan Policy 2014.
The rating assigned at the time of credit approval process shall form the basis for taking following
decisions
1. Acceptance criteria : cut-off grade for investment - based on obligor rating (BOB-6 and
above and GF2 for Green Field Projects)
2. Risk Based Pricing - based on composite rating
3. Discretionary Lending Power for sanction / review - based on obligor rating. Deciding
Enhanced /Reduced DLP as the case may be
4. Sanction of Ad-hoc /Excess/DAUE - based on obligor rating.
5. Inspection of securities - based on obligor rating (Decising the Frequency of Inspection of
prime security)
6. Rating based exposure ceiling- based on obligor rating
7. RAROC- Based on Obligor & Facility Rating
We refer to circular No. BCC/ BR/ 99/ 41 dated 10.02.2007 wherein detailed guidelines were given
for implementation of new BOBRAM rating models for commercial advances customers.
Subsequently revised guidelines were issued on applicability/eligibility criteria of
LCM/SME/SMEServices models and changes made in few procedures of BOBRAM vide circular
No.BCC/BR/100/97 dated 19.03.2008, BCC/BR/100/217 dated 01.07.08, BCC:BR:101:142
dated21.04.2009 and BCC/BR/101/194 dated 13.07.2009 and Upgradation of Four existing BOBRAM
Rating Models( Large Corporate, SME Manufacturing, SME Services & Traders Model) vide circular
no. BCC:BR:109:209
 Bank of Baroda Risk Assessment Module (BOBRAM)
Under BOBRAM there are 14 models as under:

S. Model Applicable for Rating of
No.
1. Large Corporate  Manufacturing units with Sales turnover of overRs. 150 Crore
 All Infrastructure projects which have started cash generation
from the project operations with part/full implementation.
 All companies with core activity of services having annual turnover
of more than Rs.500 Cr or net revenue Of more than Rs.50 Cr
2. SME Manufacturing units with Sales Turnover upto Rs. 150
(Manufacturing)
3. SME (Services) All Companies with core activities as services, having Annual turnover
upto Rs.500 Cr or net revenue upto Rs.50 Cr
4. Traders Units engaged in trading activities irrespective of their turnover
amount
5. Real-Estate Commercial Real Estate Units
6. Banks Banking activities.
7. NBFCs Organizations registered with RBI / NHB/SEBI/FMC for carrying out
non-banking financial activity/ housing finance activity.
8. Brokers Entities engaged in broking business in shares/ securities (entities
registered under SEBI / FMC)
9. Infrastructure Infrastructure-Power Projects (Generation & Distribution) - Build
(Power) stage i.e. implementation stage where cash generation from the
project is not yet started.
10. Infrastructure Infrastructure-Roads & Bridges Projects - Build stage i.e.
(Roads & Bridges) implementation stage where cash generation from the project is not
yet started.
11. Infrastructure Infrastructure-Ports Projects - Build stage i.e. implementation
(Ports) stage where cash generation from the project is yet not started
12. Infrastructure Infrastructure-Telecom Projects - Build stage i.e. implementation
(Telecom) stage where cash generation from the project is yet not started.
13. UAE Rating model for UAE territories
14. UK Rating model for UK territories
There are three assessment type options available

1. Greenfield Project: This model is applicable to new projects by new company.
2. Company with Project: This model is applicable to project/ term loans for existing units
or for Brownfield expansion. Assessment type is applicable when the project cost is more
than or equal to 40% of the NETWORTH of the company, alongside company rating, project
rating also need to be done.
3. Company without Project: Applicable to working capital facilities, normal capital
Expenditure, corporate loans etc. Assessment type is applicable when the project cost is less
than 40% of the NETWORTH of the company, then only company rating is done.
These Rating models are based on two dimensional rating methodologies specified under Basel- II
requirements wherein -5- types of risks silo viz. Industry Risk, Business risk, Financial Risk
and Management Quality Risk, Account Conduct Risk are assessed pertaining to the
characteristics of an obligor (Borrower) while facilities proposed/ sanctioned to a company are
assessed separately under second dimension of rating i.e. Facility Rating. Thus, three ratings are
worked out under CRISIL solution viz. Obligor Rating, Facility Rating and Composite Rating.
Overall Company Rating is assessed based on these risk silos
 Company Risk Rating (Weighted Scores)

 Industry Risk
 Business Risk
 Financial Risk
 Management Risk
 Account Conduct Risk
 Project Risk Rating (Minimum of PIR & PPIR Score)

 Project Implementation Risk
 Construction Risk – PIR
 Funding Risk – PIR
 Post Project Implementation Risk
 Industry Risk
 Business Risk
 Project Financial Risk
 Management Risk – Project
 RATING COMPONENT WEIGHTAGE
Each rating models have different weightage for different rating silos
Table-1
SME- SME- Large Real

Rating Silo Trader
MFG Services Corporate Estate
Company Risk
Industry Risk 0.10 0.10 0.05 0.15 0.15
Business Risk 0.20 0.20 0.35 0.30 0.30
Financial Risk 0.35 0.35 0.25 0.40 0.25
Management Risk 0.10 0.10 0.10 0.15 0.30
Differential
Account Conduct Risk 0.25 0.25 0.25 NA
Weight
Project Risk
Project Implementation Risk
Construction Risk- PIR 0.50 0.50 NA 0.67 0.67
Funding Risk-PIR 0.50 0.50 NA 0.33 0.33
Post Project Implementation Risk
Industry Risk 0.15 0.15 NA 0.15 0.15
Business Risk 0.25 0.25 NA 0.30 0.30
Project Financial Risk 0.35 0.35 NA 0.40 0.25
Management Risk
0.25 0.25 NA 0.15 0.30
Project
Table-2
Rating SILO BANK NBFC BROKER UK/UAE
Company Risk
Industry Risk 0.20 0.20 0.15 0.15
Business Risk 0.20 0.20 0.45 0.30
Financial Risk 0.35 0.35 0.20 0.30
Management Risk 0.25 0.25 0.20 0.25
Notch Up Scoring
Ownership / Shareholding NA 0.30 NA NA
structure
Management Control NA 0.30 NA NA
Stated Posture of the parent NA 0.20 NA NA
towards the NBFC
Past Track Record NA 0.10 NA NA
Brand Name NA 0.10 NA NA
Ownership / Shareholding NA 0.30 NA NA
structure
Table-3
Rating SILO ROAD POWER PORT TELECOM

Operational Phase Risk
Business Risk 0.44 0.32 0.44 0.28
Financial Risk 0.32 0.32 0.32 0.28
Environment
NA NA NA 0.14
Risk
Industry Risk 0.04 0.16 0.04 NA
Other Key Risk NA 0.20 0.20 NA
Critical Risks 0.20 NA NA 0.30
Build Phase Risk
Completion
0.50 0.40 0.40 0.40
Risk
Execution Risk 0.50 0.50 0.50 0.50
Stabilization
NA 0.10 0.10 0.10
Risk
 ACCOUNT CONDUCT RISK
Previously, each rating model consists of -4- Rating silos i.e. Industry Risk, Business Risk, Financial
Risk and Management Risk. In addition to the above -4- silos, a new silo Account Conduct Risk is
added to enhance the default predictability of the Obligor (Borrower). The parameters under each
rating model are different under this Account Conduct Risk Silo. Separate weight is allocated for this
silo under each model and rating of the borrower shall be arrived at using the respective weights.
Parameters Corporate & SME – Services &

Manufacturing Model Trader Model
Past Track Record of Payment 25% 25%

CIBIL Score of the Key Promoters NA 25%
Average Churn vs Limit Utilization 20% 15%
Trend in the DP limit over past 12 months 20% 15%
Ad-Hoc Limits/ TODs taken over last 12 20% 10%
months
Number of LC/BG devolvement over last 15% 10%
12 months
 RATING MODIFIER:
A new feature "Rating Modifier" has been added to all of the -4- rating models Large Corporate,
SME-Manufacturing, SME-Services, and Traders Models only to enhance the model
predictability.
There are two types of Rating Modifier
 Rating Modifier for Notch Down
 Rating Modifier for Capping the Rating
Modifiers considered for capping Final ratings at Sub-Investment grade
 Account of the entity has been into the NPA Category in the past 12 months
 Entity has undergone stress restructuring in past 12 months
 Any group / associated entity has been classified as NPA within last 3 years and can have
substantial impact on group performance
 Any evidence relating to or fraud against the entity or promoters by the
 Government/Regulatory/authority/CBI/ED/SEBI/RBI/FEMA/Banks/key stakeholders etc.
 Promoters/Promoter Directors / Key Management Personnel are in the RBI list of defaulters
In case any of these modifiers are true for an entity, then the bank may cap the final ratings of the
entity at the sub-investment grades
Modifiers considered for Notch-down of Final Ratings

 Negative net worth
 Adverse liquidity position vis-à-vis loan repayment evidenced by adverse liquidity position
arising due to stretched receivables/slow realization of debtors/excess inventory
levels/inability to meet large repayment in near term/inability to raise funds from external or
internal sources/substantial cash flow mismatch
 Large Capital Withdrawal in last 3 years (partnership firm)
 Non-compliance with regulatory requirements and / or violations reported by regulators
(RBI, SEBI, FEMA)
 Adverse labor relations, where the management's ability not to sustain is perceptible
 History of major legal issues excluding cases related to VAT / excise / tax related matters or
cases pending appeal, which is likely to impact the operations of the company significantly
In case two of these modifiers are true for an entity then the bank may downgrade the final ratings
of the entity by one notch. In case three or more of these modifiers are true, the final rating may
be downgraded by two notches
In case an entity has been scored sub-investment grade then, there would not be any impact of the
first set of modifiers and only second set of modifiers would impact. Whereas, if an entity has been
rated at investment grade then both the sets of modifiers would be applicable and impact of second
set of modifiers would be applied after applying the impact of first set i.e. if an entity is rated
„Grade II‟ and if one of the parameters of set 1 is true along with one out of set 2 parameters
being true – then the rating would be first brought down to sub-investment grade and then it would
be further scored down by 1notch.
The rating processes give three types of ratings for each credit facilityviz.
1) Obligor (Borrower) Rating - for credit worthiness indicating Probability of Default(PD).

The rating grade ranges from BOB-1 to BOB-10, BOB-3 to BOB-10 and BOB-6 to BOB-
10depending upon the rating model used.
2) Facility Rating - representing the Loss Given Default (LGD). The rating grade rangesfrom
FR-1 to FR-8
3) Composite Rating - this is indicative of the Expected Loss (EL). It is combination of

Obligor Rating and Facility Rating. The rating grades ranges from CR-1 to CR-10.
 STEPS INVOLVED IN CREDIT RATING THROUGH BOBRAM
Step 1: Selection of Appropriate Model
Based on the criteria narrated above, the applicable model is to be selected for rating exercise.
Step 2: Preparation of Data Input Sheet
Having selected one of the applicable models for the rating purpose, only the prescribed CMA data
based input sheet and / or project profitability data input sheet downloaded from Bank's INTRANET
/ BOBRAM to be used. This sheet is to be filled in by the credit officers in the off-line mode after
due diligence of the CMA / Project financials etc by the appropriate authority, for that particular
borrower. Please note that only the prescribed data inputsheet has to be used for the purpose of
data entry and subsequent uploading during the rating process. Any other data input sheet except
the one as stated above is not suitable for uploading during the rating process.
Step 3: Rating Exercise
 The server is available on FINACLE PCs

 Use the login name and password allotted to enter the rating pages. User ID Creation will
happen within BOBRAM, Level 1 (L1) user to initiate request within BOBRAM itself.
 Detailed methodology for the rating process has been released by way of circular No.
BCC/RM/CRC/98/12 dated 01/03/2006. The said circular also contains the manual for
operating instructions (OMRAM06) (Copy of the circular is available on intranet-Corporate-
Risk Management),
 A credit officer is supposed to have done prior study of company's operations and should
have analyzed rating parameters which are to be rated / scored for that particular company
under different modules. Prior study is essential, as the allotted score for a particular
parameter has to be supported with proper justification at the space provided for the said
purpose on the computer screen.
 Other data input requirements for rating of different modules under obligor rating is already
made available as under:
 Rating of Industry Risk Score (except for SME / trading) - The credit rating officer has to
select the relevant industry sub sector at the activity page during the rating process. Rating
of Industry Risk Score (for SME / trading) - The credit Rating officer has to carry out the
rating of all parameters after selecting the dependent industry and the risk scores under
various parameters are not made available as in the case of other models.
 Financial Risk Assessment: Data sheet for that particular borrower (refer step 2 above) is to
be uploaded at appropriate prompt (Please refer the OMRAM06 which is a step-by-step
guide for this process). While most of the parameters are scored automatically, only certain
subjective parameters like comments on Obligor's (Borrower's) ability to raise debt / equity
etc. are required to be scored with proper justification.
 Business Risk / Management Quality Risk assessment: Necessary information / data input
required by way of Industry Profiles/ Updates etc. is already circulated as well as uploaded
on INTRANET at the Risk Management page. Please note that only the parameters relevant
to the industry of operations of the Obligor (Borrower) are automatically made available for
scoring. The other subjective parameters are required to be scored by credit officer with
proper justification.
Step 4: Facility Rating:
After completing the obligor rating as above, facility rating is to be carried out. For this purpose, the
security value is to be appropriated first against the respective facilities and thereafter the excess
security over the outstanding amount of facility enjoyed is to be worked out. This excess security is
distributed over the remaining facilities in proportion to the availment. The Limit amount of each of
the facilities considered / under consideration and the amount of securities, existing/ proposed, are
to be worked out by above stated method by allocation of excess security and then filled in at
appropriate pages during the facility rating process as the case may be. After filling up the data as
stated above the facility rating, separate for each facility, is automatically worked out by the
system.
Step 5: Composite Rating (CR Rating):
This rating is automatically worked out, once the obligor rating and the facility rating are in place.
With the completion of above five steps, the credit risk rating process is over.
Step 6: Submission of the credit rating to the Validator:
The credit rating officer is required to comply with the following steps:
Get -2- hard copy print outs of the "Interim Company Report" from the reports section in the on-
line mode. The relevant PDF file for "Interim Company Report" has also to be saved in the system
by the credit rating officer on his computer for any reference.
One copy of the above stated "Interim Company Report" is to be sent to the appropriate validator
(Refer point No.1 of step -7). A credit officer has also to submit the hard copies of the financial data
(audited or provisional) along with the relevant records, which have been used during the risk
rating process to the validator for further processing. The second copy of the "Interim Company
Report" has to be kept by the credit rating officer for records.
Credit risk rating done on software has to be submitted online to the validator (located at the office
of sanctioning authority) or to Risk management department if exposure is above Rs. 5.0
crore for further processing
Whenever a proposal for certain credit facilities is submitted to the sanctioning authority, one hard
copy of the latest validated 'Interim Company Report' received from the validator is required to be
sent to the sanctioning authority.
It has also been clarified that submission of following documents in soft copy only to be done to the
concerned validator immediately after completion of rating but in no case later than 3 days of
submission of rating in the BOBRAM system
1. Copy of last review/appraisal/sanction
2. CMA
3. Last audited financials
4. Security allocation sheet
(Ref: BCC:BR:107:238 dated 27.05.2015)
Step 7: Validation
Credit Rating of borrowal accounts carried out under BOBRAM Model are required to be validated
and finalized by the respective authorities as per extant guidelines. BOBRAM Credit Rating for all
Facilities with Rs.5.00 Cr and above have been centralized for validation at Risk Management Cell,
BCC.The validator is required to comply with the following steps:
a) The validator is required to validate the credit risk rating based on the financial data
(audited or provisional) & other relevant records, which have been used during the credit
risk rating process by the rating officer. However, all proposals falling under the powers of
branch Manager are to be validated at Regional Office Level or the reporting authority level
as the case may be.
b) After due validation, the validator is required to take out -3- hard copy print outs of the
'Interim Company Report' and send one copy to the credit rating officer, the other copy to
the sanctioning authority and the third copy may be kept on records.
c) Validator is required to submit the validated credit rating to the appropriate sanctioning
authority through the system.
With the completion of seven steps as described above, the credit risk rating and validation process
stands completed.
Step 8: Submission of Validated Credit Risk Rating Report and other MIS Reports to the
Sanctioning Authority
The sanctioning authority has no role during the process of credit risk rating, as also during the
process of validation.
A copy of the validated rating report is to be attached to the proposal. The following
reports could also be generated through the system.
a) Company Comparison Report
b) Financial Reports (All Labels) viz. CMA financials, Project Financials, Ratios
c) MIS reports like ASCROM Industry wise, Borrower group wise etc. as desired by the
authority.
d) Strengths & Weaknesses Report
 PERIODICITY OF CREDIT RATING
 Rating exercise for advance accounts will be carried out on yearly basis
 The rating exercise is not to be linked with the review of the account and it is to be carried
out in specified fixed periodicity (annual) based on accounting year of the borrower.
 Credit rating on BOBRAM models based only on annual audited financials in all eligible
advance accounts as per existing guidelines. Only in case of any adverse situation faced by
the relevant industry/ company/ management which may come to the notice of the Bank,
either by the borrower or from any other source, rating may be reviewed immediately in all
such accounts with exposure (fund based +Non fund based) of Rs. 5 crores and above.
 Credit Policy Committee (CPC) has directed that the borrowers with exposure of Rs. 5.00
crores and above with internal rating of BOB 1 to BOB 4; falling under SMA 1 category; are
to be re- rated immediately. The re-rating is to be initiated immediately and completed at
the earliest, but not later than by the end of the week. (Ref: Circular No. BCC/BR/109/571,
dated 31-10-2017)
 Assuming that the financial year end of a borrower is March, the date of effect of the
interest rate arrived at based on credit rating will be 1st October. Where the financial year
end is other than March, the periodicity of rating exercise and the date of effect of the
revised interest rate will get shifted suitably, keeping the time gap constant
 EXTERNAL CREDIT RATING
All Corporate/large borrowers with exposure of Rs 5.00 crore and above are duly rated by an
approved ECAI (External Credit Assessment Institutions). The Reserve Bank of India has decided
that banks may use the ratings of the following domestic credit rating agencies for the purposes of
risk weighting their claims for capital adequacy purposes:
i. Credit Analysis and Research Limited (CARE)
ii. CRISIL
iii. ICRA
iv. Brickwork Ratings
v. SMERA Ratings Ltd (SMERA)
vi. INFOMERICS Valuation and Rating Pvt. Ltd (Ref: Circular No. BCC/BR/109/314, dated 23-06-
2017)
vii. India Ratings and Research Private Limited (India Ratings);
The rating agency is required to review the rating at least once during a period of 15 months.
Hence, the ratings assigned to the borrower(Issuer Rating) or our exposure (Issue Rating), as the
case may be, may be due for review during the current year
In respect of external rating for Baroda Traders Loan, it has been clarified by our Risk Management
Department that external credit rating is to be done where Exposure is above Rs.5.00 Crores under
Baroda Traders Loan also. (BCC:BR:107:601 dated 03.12.2015)
Ref: Circular No.

1. BCC/BR/102/198 dated 22-07-2010
2. BCC/BR/101/194 dated 13-07-2009
3. BCC/BR/99/41 dated 10-02-2007
4. BCC/BR/100/217 dated 01-07-2008
5. BCC/RM/CRC/98/12 dated 01-03-2006
6. BCC/RMD/BR/107/04 dated 01-01-2015
7. BCC/BR/108/329 dated 18-07-2016
8. BCC/BR/107/238 dated 27-05-2015
9. BCC/BR/104/432 dated 01-12-2012
10. BCC/BR/108/132 dated 21-03-2016
11. BCC/BR/109/209 dated 21-04-2017
12. BCC/BR/109/314 dated 23-06-2017
13. BCC/BR/109/571 dated 31-10-2017
Test your Learning
1. The Periodicity of Inspection of Stocks for a BOB-5 Rated Account-

a. Half-yearly b. quarterly c. bi-monthly d. based on the limit e. none
2. What is the BOBRAM Application Rating Model for a manufacturing unit with Sales turnover
upto Rs. 150 Cr?
a. Large Corporate Model
b. SME (non regulatory)
c. SME (Manufacturing)
d. MSME Model
e. Traders
3. Units engaged in Trading activity with Annual turnover /income upto ________ will be
classified under Traders Rating Model
a. Rs.50 Cr b. Rs.100 Cr c. Rs.300 Cr d. Rs.500 Cr. e.Rs.150 Cr
4. Which of the following do not come into picture while doing Facility Rating under BOBRAM?
1. Type of security 2. Value of Security 3. Capacity to raise debt/equity
4. quality of Accounting
a. 1, 2 & 3 b. 1, 2 & 4 c. 3 & 4 d. only 4 e. only 1 & 3
5. Which of the following is not a parameter while carrying out Obligor Rating?
a. Business b. Industry c. Economic d. Financial e. Management
6. Date of effect for the Rate of Interest after completing BOBRAM Rating for an Advance
account is _________
7. External Credit Rating is mandatory for all the exposure of _________and above from the
Bank as per RBI guidelines
8. BOBRAM Rating & Review of an existing Facility are same and happen combined.
TRUE/FALSE
9. Documents in soft copy only to be submitted to concerned validator immediately after

completion of rating but in no case later than 3 days of submission of rating in the BOBRAM
system.
TRUE/FALSE
10. Facility Rating is indicative of the Expected Loss (EL).

TRUE/FALSE
Answers to Test your understanding
Qno Answer
1 b
2 c
3 d
4 c
5 c
6 1st Oct
7 F
8 F
9 T
10 F
15. CREDIT AUDIT
Credit Audit is a process of examining compliance with extant sanction terms and conditions and
post sanction processes/ Procedures laid down by the Bank from time to time.
 OBJECTIVES OF CREDIT AUDIT

 Improvement in quality of credit portfolio
 Review of sanction process and compliance status of large loans
 Feedback on regulatory compliance
 Independent review of credit risk assessment
 Pick up of early warning signals and suggest remedial measures
 Recommend corrective action to improve credit quality, credit administration and credit skills
of staff etc.
 COVERAGE
All fresh Sanctions/Existing accounts including Retail Loans and Restructured Accounts with
aggregate exposure of Rs.10/- crores and above (Fund based + Non fund based)
5% of borrowal accounts randomly selected from the rest of the portfolio as under
i) Fresh Accounts sanctioned with exposure of Rs. Rs.1/- crore above but below Rs.10/-
crores (Fund based + Non fund based).
ii) Accounts reviewed with increase with aggregate exposure of Rs.1/- crore above but
below Rs.10/- crores (Fund based + Non fund based).
Fresh sanction and reviewed with increase account of Sister Concerns / Group/ Associates
concerns of above accounts, with threshold limit of Rs. one crore & above (Fund based + Non
fund based).
All the mandatory guidelines contained in RBI circulars be complied with.
Exclusion from coverage of Credit Audit (Both for Main Concern and its associate
concerns):
a. All the self liquidating advances granted against the security of Bank’s own deposits, 100% cash
margin, Govt. Securities like NSC/KVP/IVP etc. either granted to the main eligible account and or
its associates.
b. All short term clean loan
c. All Short reviews
d. All Non Performing Advances.
Selection of Credit Auditor:
As per Credit Audit Policy 2017, a dedicated group of experienced / specialized officers is created,
who will be conducting the credit audit of the eligible accounts. These officers may be located at
the respective ZIADs for the operational convenience.
 SALIENT FEATURES OF CREDIT AUDIT
 Credit audit should be conducted within a period of 3 to 6 months of sanction / review.
 However, it should be ensured that before undertaking the credit audit exercise the
disbursement has taken place in the subject account however within the overall limit of 6
months.
 Credit audit of eligible accounts is to be carried out by the designated Officer/s of ZIAD.
 In the beginning of each quarter, Zonal Internal Audit Division will call information/list of
eligible accounts for Credit Audit sanctioned during previous quarter, from concerned Zonal
office under whose jurisdiction ZIAD falls.
 Each Zone in the beginning of each quarter, will submit the information on eligible accounts
– Region wise. (including CFS branches falling under their jurisdiction) which have been
sanctioned fresh /reviewed with increase during preceding quarter and are eligible for
carrying out credit audit as per extant guidelines of the Bank, to the concerned Zonal
Internal Audit Division in the prescribed format.
 On receipt of list of eligible accounts for credit audit from the Zonal Office, Zonal Internal
Audit Division will allot such eligible accounts to staff/executives identified for Credit Audit.
 Credit Auditor is required to submit the report of the credit audit directly to General Manager
(Internal Audit), Central Internal Audit Division, Head office, Baroda with a copy to the
concerned Branch and the Regional Office under whose jurisdiction the branch where the
credit audit is conducted falls, within -3- days of the close of the credit audit exercise.
For further details, please refer following circulars

BCC:BR:95 / 418……… Dtd. 31st December 2003
BCC:BR:100/141………Dtd… May 21, 2008
Credit Audit Policy--------2017
%%%%%%%%%%%%%
MMR : MONTHLY MONITORING REPORT
 MMR is one of the tools of credit monitoring of advance accounts.
 OBJECTIVE OF MMR IS:-

 To prevent asset quality slippage
 To take timely corrective steps
 To improve the quality of credit portfolio
 Advance accounts with exposure (FB+NFB) of above Rs.10 crores, Monthly Monitoring Reports
to be submitted by branches to R.O on or before18th of each month through on-line web-based
software developed by the IT Department for MMRs called CREMON. The MMRs should reach
BCC from R.O through Z.O with their comments/observations through CREMON on or before
20th of each month.
 MMR is to be submitted to respected authority within 5 days of the reporting date i.e. 15 th of
each month :-
Exposure (FB+NFB) WHO will monitor
Upto Rs.1 cr. Branch Manager to monitor the --
account.
Above Rs.1 cr. upto Regional Manager to monitor R.O. to forward the same to Z.O. for
Rs.5 cr. the account. further monitoring.
Above Rs.5 cr. upto Zonal Manager to monitor the Z.O. to forward the same to BCC for
Rs.10 cr. account. further monitoring.
Above Rs.10 cr. BCC to monitor the accounts
above Rs.10 crores
The MMRs for accounts above Rs.1 crore, to be submitted by branches to R.O. on or before 18 th of
each month through on-line based software developed by the IT department for MMRs called
CREMON. R.O. to forward the same to Z.O. by 21st of the respective month and Z.O. to BCC by
25th of the respective month. #
# The readers are requested to refer to Circular No. BCC:BR:110:119, dated 09.03.2018,
regards to the guidelines of CREMON usage.
 HIGH RISK accounts: BCC will monitor all such advance accounts of HIGH RISK borrowers
(credit rating BOB 6 and below), where exposure is above Rs.1 cr. Upto Rs.5 cr. through
summary reports received from R.O. on monthly basis.
 R.O. to further monitor all advance accounts with exposure from Rs.1 lacs to Rs.25 lacs based
on scrutiny of ASCROM data and all advance accounts with exposure above Rs.25 lacs upto
Rs.1 cr. based on Quarterly Monitoring reports(QMR) received from Branches/ scrutiny of
ASCROM data.
 Accounts causing concern: R.O. are to submit a summary report in the prescribed format on
advance accounts causing concern:
 With exposure of above Rs.1 cr. To Rs.5 cr. along with copy of MMRs to BCC with a copy
to Z.O. at monthly interval, within 7 days of reporting date of MMR (i.e. before 22 nd of
each month)
 With exposure of above Rs.25 lac to Rs.1 cr. alongwith copy of QMRs to BCC with a copy
to Z.O. at quarterly interval, within 7 days of reporting dates of QMR, which are 15 th
March, 15th June, 15th September and 15th December.
PSR : Post Sanction Reporting
 Bank follows a Post Sanction Reporting System replacing the erstwhile Post Sanction
Scrutiny.
 PSR is to be submitted to the next higher authority.
 The features of PSR are:

 Covers all sanctions and credit decisions viz., Fresh / Increase / Renewal / Rejection
/Adhoc / Excess / Modifications / Waivers / restructuring / rescheduling etc., excluding
sanction of staff advances, LABOD (i.e. post sanction reporting of LABOD and staff loans
is not required).
 Broad parameters relating to sanction are only examined by the PSR authority whereas
the sanctioning authority shall take care of all procedural details on credit appraisal,
adequacy of security, documentation etc.,
 Observations of PSR authority are to be attended immediately, which shall also serve as
guide to the sanctioning authority for future.
 Disbursement of credit facility/ies is not to be withheld merely for want of observations

of the competent authority on PSR.
 PSRs upto following exposure are to be submitted in single line statement format on
monthly basis to PSR Authority alongwith a common covering letter :-
Branches in Area Sanction Threshold (FB+NFB) Other Retail

than Retail, Excl. LABOD & Staff Loan
Metro & Urban Rs.25 Lakhs Rs. 5 Lakhs
Semi Urban & Rural Rs.10 Lakhs Rs.5 Lakhs
 For decisions involving exceeding above limits the following things to be individually
submitted within 3 days of date of sanction to PSR authority :-
 Copies of Credit Proposal

 Appraisal Note
 Latest financials with necessary comments by the sanctioning authority
 Latest credit rating sheet
 Gist of major adverse features and noncompliance of stipulated terms and conditions
and the sanctioning authority’s comments thereon.
 The PSR authority is required to clear the proposal from PSR angle within a period of –30-
days from the date of receipt of proposal by the PSR Authority. If the PSR authority
has not made any observation within the said period, it will be presumed that the PSR
authority has no observation to make and the proposal is cleared from PSR angle.
PSR noting of the proposal sanctioned by different authorities is an administrative process and
authority carrying out PSR need not have sanctioning powers. As such, the PSR observations/
noting shall continue to be carried out by the next higher authority as hitherto and minutes of the
sanction by the committee be reported to the next higher committee e.g. proposals sanctioned by
the Zonal Credit Committee to be submitted to the respective Corporate GM for PSR noting and
minutes of the meeting covering sanctions / credit decisions be submitted to respective COCC- ED
committee
Procedure for Retail Loan Factory
1. All credit proposals, wherein credit officers, have taken credit decisions shall be put up to
Incharge of RLF for PSR noting.
2. Sanctions /credit decisions taken by Incharge of RLF shall be submitted to Regional Office to
which it is attached on monthly basis for noting of PSR, as per extant guidelines
TEST YOUR UNDERSTANDING (Credit Audit, PSR and MMR)
1) Credit Audit applies to all fresh sanctions with limits of :-

a) Rs.5.00 crore and above
b) Rs.10.00 crores and above
c) Rs. 1.00 crore and above
d) Rs.Rs.25.00 lacs and above
e) No limit fixed.it applied in all sanctions.
2) Credit Audit covers all existing accounts with exposure of :-

a) Rs.10.00 crore and above
b) Rs.5.00 crores and above
c) Rs. 1.00 crore and above
d) Rs.Rs.25.00 lacs and above
3) Credit Audit is done by credit auditor belonging to :-

a) Another branch
b) Same region
c) Another Region
d) Outside Bank person
e) Any officer of the bank posted anywhere
4) Accounts with exposure of Rs.1 crs to Rs.5 crs are monitored via MMR by
a) Branch Manager
b) Region Office
c) Zonal Office
d) BCC
e) SPTF
5) MMR is prepared as of :-
a) Last day of the month
b) 15th day of the month
c) 10th day of the month
e) 1st day of the month
6) Single line format of PSR is applicable for retail advances up to :-

a) Rs.15.00 lacs
b) Rs.25.00 lacs
c) Rs.5.00 lacs
d) Rs.10.00 lacs
e) Rs 1 lac
7) PSR covers the following :-

a) Staff loans & LABOD
b) Only fresh sanctions
c) Only review with increase
d) Covers all sanction and credit decision (except staff loans & LABOD)
e) All of the above
8) Sanction has to be cleared from PSR angle in how many days from the date of receipt of
sanction with PSR authority ?
a) 15 days
b) 30 days
c) 10 days
d) 90 days
e) 45 days
9) PSR stands for :-

a) Pending Sanction Reporting
b) Pre Sanction Reporting
c) Post Sanction Reporting
d) Post Sale Reporting
e) Pending Sanction Register
10) All high risk accounts (expo. BOB 6 and onwards) with expo. above Rs.1 cr are monitored
based on summary reports, by :-
a) Branch Manager
b) Region Office
c) Zonal Office
d) BCC
e) STPF
KEY
1 2 3 4 5 6 7 8 9 10
a a c b b c d b c d
State true or false
Sr No True or False
1 MMR is not one of the tools of credit monitoring of advance accounts
2 PSR is to be submitted to the next higher authority
3 Broad parameters relating to sanction are only examined by the PSR
authority whereas the sanctioning authority shall take care of all
procedural details on credit appraisal, adequacy of security,
documentation etc
4 Observations of PSR authority are to be attended immediately, which
shall also serve as guide to the sanctioning authority for future
5 Credit audit should be conducted within 3 to 6 months of sanction /
review
6 MMR above Rs. 1.00 crore to be submitted by branches to R.O. on or
before 18th of each month through on-line based software developed
by the IT department for MMRs called CREMON
7 Credit audit of eligible accounts of one Region is to be carried out by
Officers of Same Region within the same Zone
8 The PSR authority is required to clear the proposal from PSR angle
within a period of –30- days from the date of receipt of proposal
9 Disbursement of credit facility/ies is to be withheld for want of
observations of the competent authority on PSR
10 All credit proposals, wherein credit officers of RLF, have taken credit
decisions shall be put up to In-charge of RLF for PSR noting
1 2 3 4 5 6 7 8 9 10
False True True True True False False True False True
16. PREVENTIVE VIGILANCE
 IMPORTANCE:
The importance of vigilance in our daily life is aptly established in the quote of John Philpot Curran,
an Irish orator, politician, lawyer and judge who stated that “The condition upon which God has
given liberty to man is eternal vigilance”. Pearl S. Buck, an American writer and novelist had further
reinforced the importance of vigilance in our daily life by stating that “When good people in any
country cease their vigilance and struggle, then evil men prevail”.
These observations made years back hold true even today, where one has to be ever vigilant to
ensure that no harm befalls him, his family or the society at large. Hence, the need for awareness
about vigilance and the various dimensions to it has become all the more critical in the modern
public space.
 MEANING & OBJECTIVES

The dictionary defines vigilance as being watchful and wary to detect danger; being ever awake and
alert. While being vigilant is important in all walks of life, the observance of vigilance becomes more
critical in the financial sector and particularly for institutions like banks, which deal with public
money. In general parlance-
 Vigilance means ‘watchfulness and caution’.

 Vigilance is not limited to a section of employees. Each and every employee of the bank
is required to be vigilant since we are dealing with public money.
 Risk taking forms an integral part of the banking business.
 The purpose of vigilance activity in public sector banks is not to stifle such activity or
obstruct the progress/ business growth.
 Its main objective is to enhance managerial effectiveness both at micro as well as macro
levels. Vigilance is an essential management function in the interest of the society at
large
 VIGILANCE IN BANKS AIMS AT

 Ensuring integrity.
 Protecting innocent – Supporting quality decisions.
 Eliminating forces that prevent integrity.
 Preventing deprival or loss for the bank
 NEEDS
Banks, which act as an intermediary between depositors and lenders, are duty bound to observe
the highest standards of safeguards to ensure that money accepted from depositors are not mis-
utilised and are put to gainful use or are available with them to be paid on demand. In order to
ensure this, banks are not only required to do due diligence on the borrowers but are also expected
to put in place appropriate safeguards to ensure that the transactions being undertaken by the staff
are as per laid down guidelines.
The watchfulness enforced by the vigilance function is required to ensure that public money, which
banks hold in fiduciary capacity, is not allowed to be misused by the delinquent elements in any
manner.
 BACKGROUND
The need to have a dedicated body to look into vigilance and anti-corruption issues in public sector
undertakings was felt way back in the early 1960s when Government of India set up the Committee
on Prevention of Corruption [popularly known as Santhanam Committee] on whose
recommendation the Central Vigilance Commission (CVC) was set up in February 1964 as an Apex
Body with its vigilance units headed by Chief Vigilance Officers. The Commission was since
accorded statutory status on August 25, 1998 through the Central Vigilance Commission Ordinance,
1998 which was substituted by Central Vigilance Commission Act, 2003.
Public Sector banks fall under the jurisdiction of Central Vigilance Commission on account of their
incorporation and operation as public sector entities. The guidelines on vigilance administration are
issued by the CVC. The Chief Vigilance Officers in the respective organisations have been authorised
to decide upon the existence of a vigilance angle in individual cases
 TYPES OF VIGILANCE
There are three aspects to the vigilance function – Preventive, Punitive and Participative –
(surveillance and detection).
• Preventive Vigilance aims at minimising the incidence of frauds, irregularities, lapses etc by
formulating remedial measures, initiating corrective action and ensuring meticulous
adherence to the laid down systems and procedures.
• Detective Vigilance is examining, investigating and inquiring.
• Punitive vigilance is disciplinary action as a deterrent.
In normal course, banks should strengthen preventive vigilance functions by inculcating a sense of
honesty and integrity among its employees and establishing internal systems and controls, which
would act as a defense against malafide activity. Preventive vigilance function is, perhaps the most
crucial and yet, the most challenging of the three aspects of vigilance that I mentioned earlier. It is
crucial because it has the potential to prevent lapses from occurring by stemming the rot at the
initial stages itself.
 WHAT IS VIGILANCE ANGLE?

• Demanding/ accepting gratification,
• Obtaining valuable things without consideration or with inadequate consideration by abusing
official position
• Obtaining for himself or for any other person any valuable thing or pecuniary advantage by
corrupt or illegal means
• Any undue/ unjustified delay in disposal of a case, perceived after considering all relevant
factors
• Possession of assets disproportionate to known sources of income
• Cases of misappropriation, forgery or cheating or other similar criminal offences.
• Allegations pertaining to personnel matters like false claims of TA/DA, Medical Medical,
LTC/LFC, submission of false caste/educational certificates, misuse of bank’s loan etc.
• Other cases such as
 gross or willful negligence,
 recklessness in decision making,
 blatant violation of systems and procedures,
 exercise of discretion in excess, where no ostensible public interest is evident,
 failure to keep the superiors informed in time etc, are referred to the Committee of
General Managers (COGM) for determining vigilance angle.
 NON-ADHERENCE OF GUIDELINES
 Non compliance of KYC norms
 Pre sanction inspection either not carried out or carried out in casual manner
 Photocopies of the documents submitted by the borrowers are not verified
from the originals
 Further genuineness of the same is not verified from independent sources
 Not obtaining credit reports from previous bankers of the borrowers/customers
 Accepting projections submitted by the borrowers without having/mentioning proper

justification
 Sanction of loans without preparing proposal in prescribed format or sanction the proposal in
altered format
 Recommending credit facilities for sanction to higher authorities without incorporating the
relevant facts/information or without disclosing the adverse features
 Non observance of four eye principle
 Exceeding lending powers
 Allowing disbursement of credit facilities without compliance of all the terms & conditions of
sanction
 Seeking authority for disbursement of credit facilities from higher authorities by submitting
false/wrong confirmation of compliance of all the terms & conditions of sanction
 Non/late submission of proposals of loans sanctioned to higher authorities for PSR.
 Not responding immediately to the PSR queries/observations made by the higher authorities
 Allowing disproportionate excesses immediately after sanction of credit facilities without

having sufficient drawing Power
 Allowing excesses even beyond the discretionary lending powers
 Not reporting immediately to higher authorities the excesses/TODs sanctioned
 Not conducting timely post sanction inspections so as to ensure end-use of funds
 Recommending take over of the accounts from other banks without compliance of the
requirements as per Bank’s guidelines
 Proper verification and cross checking of information / papers submitted by the borrower.
Noting should be made on the documents for having verified with originals
 Income related papers should be got verified through Practicing Chartered Accountants
empanelled for the purpose.
 Not verifying the conduct of the account in regular intervals.
 Non reporting of any discrepancy in the running/conduct of the account to your reporting
authority.
 Not obtaining LAD before due date.
 Mandatory search/verification of property in CERSAI portal before considering any loan against
property.
 LET US DRAW A LAKSHMAN REKHA
 Extra care and caution while granting loans where mortgage of immovable property is involved.
It is difficult to distinguish fake document from the genuine ones. For this purpose knowledge
about the customer is a must. Personal visits to the property site and verifying the Title Deeds
should be ensured in all cases.
 Select the panel advocate by experience and enquiry with your colleagues. Counter check his
work by personal verification at Sub-Registrar’s office occasionally.
 The officer is supposed to know what is a SRO, its functions, should be aware of what Title to
property means in the eyes of the law.
 The officer should be aware about the stamp act of the state where he is working to
adequately stamp the documents.
 Cash Credit and other Working Capital Limits can be entertained only after gaining sufficient
experience and after ascertaining antecedents of the borrower by way of market enquiry,
scrutiny of statement of accounts maintained with other banks etc.
 Working Capital limits should be assessed with adequate care by following norms prescribed.
Ad-hoc limits should not be sanctioned / recommended without sufficient additional evidence /
justification.
 By experience you know the nature of Bills which can be purchased / discounted. If you know
that a particular Bill / cheque is accommodative in nature, party’s request should not be
entertained despite any pressures from any corner.
 Inspection of stock as per norms should be conducted with diligence and intelligence. If you are
unable to assess the quantity, quality or value due to specific nature of the commodity,
recommend for the assistance of experts in the line. Borrower should know that you are serious
about the task.
 The mantra for granting working capital limits continues to be – need based, purpose oriented
and timely.
 Operation in the account is an indicator of health of the unit. Fall in turnover, slow down in
manufacturing / trading activity are signs of incipient sickness
 Officers should be weary of target oriented lending such as Tractor Loans. Involvement of
Dealers, dilution of minimum land holding stipulation to facilitate large number of loans etc., are
clear signs of short sightedness.
 PREVENTIVE VIGILANCE FOR CREDIT FUNCTION
1. Branches to meticulously follow Bank’s guidelines in respect of pre- sanction inspection

given in Book of Instructions – Credit Management-Pre sanction appraisal. While the
inspecting officer is required to submit report thereof, it would be better to incorporate such
details of such pre-sanction and observations thereon in the appraisal note on the account
also. It will facilitate recording of having conducted Pre-sanction. Pre-sanction inspection of
Primary security / borrowers unit and collateral security is to be ensured. Such Pre-sanction
inspection should be comprehensive covering business unit, office, books of accounts of the
applicant, market report, enquiries about the ownership of the premises etc.
2. Equally important is also to ensure post sanction inspection at prescribed intervals with due
diligence and recording thereof.
3. Similarly details of KYC guidelines to be ensured are given in our Book of Instructions.
Branches are advised to comply with the same in letter and spirit. The branches are required
to ensure obtaining satisfactory and stipulated identify proof of address and photo identity
of all borrowers. Such KYC documents of all the partners and directors as well as of the said
firm or company need to be obtained. Such identity proof and other KYC documents
submitted should be verified with the original thereof and the Branch official should also
certify the same on the branch record copy with such notation.
4. While creation of EM of properties, the branches should ensure compliance of guidelines

given in BOI and various other circulars issued from time to time.
5. When the borrower submits various statutory returns like I.T. Return, VAT returns, audited
financials etc., the branch should verify their authenticity either directly or through approved
agencies for such verification, through various relevant portals such as MCA portal. The
branches should ensure to verify the conduct of the borrower through our Bank accounts,
CIBIL reports, latest willful defaulters list circular.
6. The Branches should ensure compliance of stipulated guidelines , proper documentation

starting from obtaining the acknowledgement of acceptance of terms of sanction from all
the parties to the credit facility, obtaining disbursement authority from competent authority,
pre sanction inspection, valuation, registration of Charges with ROC, CERSAI, S.R.O.
authorities wherever is applicable. Due care should be taken in obtaining proper title
clearance reports, valuation reports from Bank’s approved professionals. While accepting the
original documents for mortgage creation due care is to be taken to ensure that all the
documents referred to in the Title Clearance report are obtained and the title deeds
furnished by the mortgagors are genuine and originals only. Precautions and more care
should be ensure particularly in view of possibility of submission of fake title deeds , certified
copies , photocopies of title deeds, multiple sale/ charging of the same property etc.,
7. More care to be taken in case of takeover of borrowers accounts from other Banks by way
of Credit reports, CIBIL reports, search in CERSAI portal, analysis of Bank statements as
regards over dues , cheque returns, servicing of interest , restructuring aspects etc.,
8. While disbursing the term loan directly to dealers, quotations submitted by the borrowers
may also be analyzed and in case of any of doubt or suspicion, it needs to be verified
through telephone enquiries or physical verification or other sources. In all cases,
submission of necessary receipts for the disbursements made, need to be ensured and
followed up for early detection of any fraudulent activities.
9. It is observed that in many cases while creating the mortgage of the property offered by
the borrower, qualifying remarks of the Advocate/valuer are overlooked by the Branches. In
view of the above, we advise that in advances involving Rs.1 crore and above Branch Head
should confirm that he has gone through the entire title clearance/valuation report and
mortgage has been created strictly as per the opinion of the advocate after considering all
the remarks in the report of the Advocate/valuer.
The above are only indicative and not exhaustive and due diligence and alertness on the part of the
dealing officials cannot be substituted by any mechanism to prevent the miscreants to carry out
their acts against the Bank. Experience indicates that the miscreants dare to carry out their actions
in those Branches / Offices where strict compliance of the Guidelines, Systems and Procedures
prescribed by the Bank are not ensured, liberally complied or compromised.
 Following are some important online sites to verify few basic documents
1. To verify the genuineness of Balance Sheet in respect of private or public limited

companies:
 Website: www.mca.gov.in
 Office of ROC is a public office and one can use the data downloaded from MCA website for
the purpose mentioned.
 Please note that in the case of private limited companies, P&L statement is treated as
confidential document and is not available for inspection on MCA portal, even though
company has filed the same. For public companies P&L statement (Form 23ACA) can be
downloaded if same has been filed by the company.
 Following link will enable to answer FAQs on how to view the public documents on MCA
portal:
 www.mca.gov.in/MCA21/dca/WebHelp/11_3_How_can_I_view_public_documents_of_a_com
pany_or_LLP.htm
 From this website selected information is available under the head “View Company Master
Data & Index of Charges’. Following information can be viewed without paying any fees:
 Authorized / Paid up share capital of the Company
 Date of last AGM
 Index of Charges
 Details of the directors
 Prosecution details, if any.
 Balance Sheet (Private / Public Limited) and Profit & Loss A/c (Public Ltd. only) can be
downloaded from the above website of MCA on payment of requisite fees online by way of
credit card.
2. To verify Permanent Account Number (PAN) Details:
 Visit: www.incometaxindiaefiling.gov.in
 Click “Know Your PAN” tab.
 Enter Date of Birth / Incorporation and Name
 If we have the PAN, we can also verify the name of the PAN holder.
3. To verify whether the auditor signing the Balance Sheet holds a valid certificate of
practice:
 Visit: www.icai.org and follow the path as under:

 Click “Members” tab
 Members Directory Search – As on date
 Search Members Database by Membership No. - As on Date
 Enter Membership Number of the Auditor
 It also indicates whether the Chartered Accountant holds a Certificate of Practice or not.

4. CIBIL Verification: www.cibil.com
 Each Zone, Region and SME LF should have password to access this site.
5. CERSAI:
 Visit: www.cersai.org.in
 Click “Online Public Search” tab (Fee for search is Rs. 50.00 (plus Service Tax) which is to be
paid online)
 Search can be performed in the following 4 simple steps:
1. Click Pay and Search Link.

2. Fill your Personal Details.
3. Fill the details of property you want to search and
confirm.
4. Proceed to pay the fee. (Fees to be paid online
through a credit card)
Download Report.
6. ECGC Defaulters’ List:
 Visit: www.ecgc.in and follow the path as under:

 Click “Customer sign” Bankers tab
 User id & Password to be filled in
 User Id & Password to be obtained from ECGC by filling in necessary application form
available in their site.
7. Verification of account in RBI portal to verify whether account is under SMA – 2

Categories. Password for the same can be obtained from Risk Management department BCC The
CRILC module is available at https://125.18.33.234/orfsxbrl/customer/index.jsp
8. Checking Supplier details
 One can verify details of supplier by checking online websites of those entities and also on
various pages of competitors
 CONCLUSION
It should now be clear that Vigilance is not perceived as a hindrance rather its purpose is
• Instilling confidence in employees for quality decision making.
• protecting interest of the innocent more than merely punishing the guilty.
Punishment has a limited intention of being demonstrative in nature. Less than 0.5% employees are
undergoing disciplinary action.
• Improving the quality of operations through vigilance administration to enjoy confidence of
stakeholders and society at large.
*********************************************************************
Test your Learning
1. Which of the following is an important source in due diligence point of view while taking up
a Credit Proposal?
a. PAN verification b. CIBIL Report c. MCA website d. CERSAI search
e. all the above
2. “As a preventive measure, a Credit Officer is expected to visit the ICAI website while
processing a Credit Proposal of a Company” what could be the motto?
a. To see the Financials of the proposed Company
b. To check the validity of the Auditor of the Company with his membership number
c. To takeout the Auditors’ Report of the Company
d. Whether the Auditor is engaged by the said company
e. All the above
3. What should be a banker’s important observations from an Audit Report?
a. Whether all statutory dues are paid
b. Whether provided for the contingent liabilities
c. Accounting practices of the company in finalizing the books
d. Any qualification remark by the auditor
e. All the above
************************************************************************
Answer Key:
Ques.No. Answer
1 e
2 b
3 e
17. Micro Small and Medium Enterprises(MSME) : An Overview
 MSMED Act
The Act was operationalized with effect from 2nd October 2006, which defines an
“enterprise” instead of an “industry” to give recognition to service sector and also defines a
“medium enterprise” to facilitate technology up gradation and graduation.
Section 7 of the Act protects the sector by restricting the investment in Plant & Machinery
in case of Industries and investment in equipments for service enterprises as below with
effect from 2nd Oct. 2006:
Activity Micro Small Enterprises Medium

Enterprises Enterprises
Manufacturing Not Exceeding Above Rs. 25lakh up Above Rs. 5cr to not
(investment in P&M Rs. 25akh to Rs. 5cr exceeding Rs. 10cr
Service (investment in Not Exceeding Above Rs. 10lakh up Above Rs. 2cr to not
Equipments) Rs. 10lakh to Rs. 2cr exceeding Rs. 5cr
MICRO ENTERPRISES: Units engaged in manufacturing, processing, preservation of goods,

mining, quarrying, servicing & repairing of specified type of machinery and equipment, agro service
units – Investment in P&M upto Rs. 25 lacs in manufacturing units and investment in equipments
upto Rs. 10 lacs in Services sector
SMALL ENTERPRISES: Units engaged in manufacturing, processing or preservation of goods or

is a servicing and repair workshop undertaking repairs of machinery used for production, mining,
quarrying or custom service units (except water service units) – investment in P&M >Rs.25 lacs and
upto Rs. 5 cr. In Services Sector – investment in equipment >Rs. 10 lacs upto Rs. 2 cr.
MEDIUM ENTERPRISES: Units engaged in manufacturing, processing or preservation of goods

or is a servicing and repair workshop undertaking repairs of machinery used for production, mining
or quarrying or Custom Service unit (except water service units) – Investment in P&M - >Rs.5 cr.
upto Rs.10 cr,. In Services Sector – investments in equipment >Rs.2 cr. upto Rs.5 cr.
SME Business Segment will not include the following:
• Financial Institutions including banks, RRBs and all types of NBFCs.
• Central & State Governments.
• Associate/sister concerns of Wholesale Banking customers, irrespective of their annual
sales/income turnover.
• Micro Finance.
Documents to be relied upon for classification of MSME: For ascertaining the investment in
plant and machinery for classification of an enterprise as Micro, Small and Medium, the following
documents could be relied upon:
(i) A copy of the invoice of the purchase of plant and machinery; or

(ii) Gross block for investment in plant and machinery as shown in the audited accounts; or
(iii) A certificate issued by a Chartered Accountant regarding purchase price of plant and machinery.
Further, for the investment in plant and machinery for the purpose of classification of an enterprise
as Micro, Small or Medium, the purchase value of the plant and machinery is to be reckoned and
not the book value (purchase value minus depreciation).
 COMPUTATION OF VALUE OF PLANT & MACHINERY:
Original price of every productive item, irrespective of whether new or second hand, acquired and
proposed to be acquired, whether on lease or hire purchase or on ownership basis. Items to be
included: Original cost of P&M (price paid by the owner / hirer/ lessor), Cost of control panel,
starters, electric motors, other electrical accessories mounted on individual machine) and Cost of
only those testing and quality control equipments which are used for/in process testing.
In case of Imported machinery:
i- Import duty.
ii- The shipping charges.
iii- Custom clearance charges.
iv- Sales Tax.
 OUR BANK’S APPROACH - MSME SECTOR FOR INTERNAL PURPOSE:

(BCC/BR/98/324 dt.28.11.06)
SMEs are growth engines and there are many advantages in financing SME. The Act provides the
regulatory definition of MSME which will be used for all the reporting and classification purposes in
all the banks.
A large number of organizations (Micro, Small & Medium sized service sector companies and
Trading Enterprises without any Plant & Machinery investment, Club, Trust etc) are left out from the
MSME sector, under the regulatory definition.
Our bank considering vital role being played by such organizations in Economic development of the
Nation and in order to capture the business, has expanded the coverage of MSMEs well beyond the
Regulatory definition as under:
All Banking business (Assets & Liabilities) with Companies / entities with annual gross sales turnover
/ income from Rs.1 Cr up to Rs 150 crores and new Infrastructure and Real Estate projects where
the Project Cost is less than Rs.50 Crores in case of Real Estate and less than Rs.50.00 Crs in case
of other than Real Estate projects are to be covered under MSME ambit. (BCC/BR/106/454 dt.
24.11.14)
The new/extended definition will only be used internally for promotion of business across these
segments. All the proposals falling beyond the ambit of regulatory definition shall be covered by
the Loan Policy Document and will attract all provisions of C & I sector, if not specified otherwise.
In this regard, Bank has set up SME loan factories based on the Assembly Line principles as a
Centralized hub for processing. We have -53 SME Loan Factories as of December, 2015.
SME Banking business will thus include the following across the Bank –
 -Micro, Small and Medium Enterprises – as per Regulatory definition irrespective of
geographical location.
 All other entities with their annual Sales Turnover of Rs.1 Crore to Rs.150 Crores and new
Infrastructure and real estate projects, where Project cost is less than Rs.50 Crores in case
of Real Estate and less than Rs.50.00 Crs in case of other than Real Estate projects.
 SMEs which are Associate/Sister concerns of Wholesale Banking Customers.
 Clubs, Trusts etc.
 Financing under various Govt schemes launched for MSME Sector.
However, such Units, which are outside the purview of regulatory definition will not form part of
Priority Sector lending.
 COMMON GUIDELINES:
1) Simple Standardized Application form for various credit limits (BCC:BR:101/13 dt.
03/01/09). There is a separate format for Adhoc basis requests vide BCC:BR:100:11 dated
01.01.2008.
2) Receipt and acknowledgement of application – Date of receipt, date for discussion,
decision within prescribed period, reasons for rejection; rejection to be referred to next higher
authority
3) Register for application received
4) Submission of Credit proposals to BCC – All credit proposals irrespective of its classification,
whether it is SME as per regulatory guidelines or SME as pr expanded coverage, with gross turnover
/ income upto Rs. 150 cr. will be processed by the SME Dept. at BCC, if it is beyond ZH powers.
All proposals falling under SME sector as per Regulatory guidelines with gross turnover / income
exceeding Rs. 150 cr. will also be processed by SME Dept., if it is beyond ZH powers.
5) Time norms for disposal of loan applications:
Upto Rs.2.00 lacs - 2 weeks; Above Rs.2.00 lacs - 4 weeks;
SME LF – 14 days (without TEV) and 21 days (with TEV).
6) Types of Facilities:
TL, DL, DPG, CC, OD, BP/BD, PC, FBP/ UFBP, DA L/C, DP L/C and BG.
 GUIDELINES FOR TAKEOVER OF ADVANCE ACCOUNTS:
a) profit making (PBT) concerns only as per latest audited balance sheet
b) Minimum BOB 6 Credit Rating
c) No reschedulement / restructuring in the existing a/c. for last -2- years
{in a, b & c deviation can be allowed by ZOCC for accounts with exposure up to Rs.3 cr.; in
other cases – COGM-MSME for proposals up to powers of RMCC; COCC-ED for proposals up to
powers of ZOCC and COCC – ED/ COCC- CMD in all other cases}
d) Satisfactory report/Statement of Account from existing bankers.
e) “STANDARD ASSET” with existing banker
f) All other existing norms , guidelines to be scrupulously followed
{Deviation can be allowed by the COCC-ED/COCC-CMD in respect of d, e, & f}
g) External rating in respect of credit proposal with exposure above Rs.5 Crores by an
approved credit rating agencies should not be below BBB & equivalent.
Financial Ratios is different for MSME accounts of few specified industry. Please refer the circular
no BCC:BR:110:75 dated 14.02.2018. This circular has provided the benchmark ratio based on the
industry classification of accounts also.
 REHABILITATION OF SICK UNITS / DEBT RESTRUCTURING SCHEME FOR SMEs /

SCHEME FOR OTS FOR SMEs: Separate policies are approved by the Board and
guidelines are conveyed from time to time by various circulars.
 ASSESSMENT OF WORKING CAPITAL:
A) WC assessment for Micro & Small Enterprises as per Regulatory definition where
FBWC requirement is up to Rs.5.00 crores:
As per circular No. BCC/BR/109/103 dated 16.02.2017, there is Modification in working capital
assessment process for Micro and Small Enterprises whose Fund based W.C requirements are upto
Rs.5.00 crores, as under :
1) Working capital credit limit increased from minimum 20% of accepted projected turnover to 25%
and the margin of the borrower will be 6.25% of the projected accepted turnover or actual NWC
whichever is higher (For Non-Digital mode sales transactions)
2) Introduction of additional 5% limit (i.e.) 30% of the portion of the assessed projected turnover
of the entity expected to be carried out through digital mode for MSEs and the margin of the
borrower will be 7.50% of the portion of turnover which is projected to be digitally transacted or
actual NWC whichever is higher.
3) Digital transactions are those sales transactions reflected in the bank books other than cash and
paper based instruments (such as cheques, DDs, Pos, etc).
4) The assessment has to be carried out both under turnover method as mentioned above and also
by First Method of Lending and the limit higher of the two must be sanctioned for new as well
as existing units.
5) When the MSEs units approach the Bank for Working capital credit limits, the entrepreneur needs
to bifurcate the actual and projected turnover into Digital and Non-Digital modes separately and
submit the same to the Bank for assessment.
6) Assessment of the limit would be separate for Digital and Non-Digital mode and the aggregate of
two will be fixed as a single limit to the borrower.
7) While accepting the projected turnover, due consideration need to be taken of the available and
proposed digital modes.
8) Units having a minimum 25% of projected turnover by way of Digital mode are only eligible for
additional Working capital assessment.
9) The working capital credit limits based on Digital turnover are to be reassessed at the time of
annual review and in case of on achievement the limits may be reworked accordingly.
B) WC assessment for Micro & Small Enterprises where FBWC requirement is above Rs.
5.00 crores and Medium Enterprises as per Regulatory definition :
The Working capital requirements will be computed on the basis of a minimum of 20% of their
acceptable projected annual turnover or First Method of Lending, whichever is higher, for new as
well as existing units. The margin requirement will be 5% of the projected accepted turnover or
actual NWC whichever is higher. Detailed assessment given in “Working Capital Assessment”
chapter.
C) WC assessment for MSMEs under Non Regulatory definition:

The assessment of working capital credit limits should be done based on second method of lending
as per Tandon committee guidelines.
Margin: TL – L&B – 30%; P& M – 25% (in exceptional cases, if financed then 40% on 2 nd hand P
& M)
WC – 25% uniform; Export Credit – 10%
(Deviation – Next Higher Authority by 5% on L&B and P&M and equipments/ current assets).
ED & CMD – beyond 5%)
Credit Rating:
 As per new Scoring model (manual) for accounts having exposure of Rs. 2.00 lacs to Rs.
200.00 lacs. (Circular BCC/BR/105/410 Dt. 20.09.2013)
 BOBRAM (CRISIL) model is applicable to MSME accounts having exposure of above Rs. 200
lacs. (Only for Regulatory)
External Rating : External Credit Rating should be carried out in all SME loan accounts with
Credit limits of above Rs. 5 Crores by any one of the RBI approved external Credit Rating agencies.
The exposure to SME borrower rated by any of these Rating agencies will be recognized as rated
exposure for the purpose of computation of Risk Weighted Assets under Standardized Approach of
Credit risk.
 TEV STUDY: As per guidelines issued by bank
 COLLATERAL FREE LOANS:
Collateral free loan will be provided to all new loans up to Rs.10.00 lacs (enhanced from Rs.5 lacs)
to the Micro & small Enterprises Sector (both Manufacturing and Service Sector) of MSME vide cir.
No. BCC/BR/102/149 dated 02.06.2010. All such loans should invariably be covered under Credit
Guarantee Scheme of CGTMSE.
The extant guidelines for extending collateral free loans (including 3 rd party guarantee/ security) up
to Rs.100 lacs to existing MSE Units based on the good track record and financial position of the
units will continue to be in force.
 MSME PRODUCTS:
Bank has designed various products to cater the need of MSME customers. This will be
explained in further chapter in detail. Please also refer circular no. BCC:BR:109:119 &
BCC:BR:109:169
18. PREPARATION OF CREDIT PROPOSALS IN MCB FORMAT
Credit Proposals to be prepared in: Arial style - Font 12

Particulars Remarks
(Paras)
Header Address of location of Sanction/Processing
Branch Name (Left Side)
SME Application Code (Right Side)
Logo of the Bank (Right Top)
Footer Name of A/c (Left side)
Name of Branch (Left Side)
Page X of Y (Right Side)
General 1. Loan track ID in the right hand top corner of the first page in case of
MSME account.
2. Rs in lacs/ Rs. In Crores is to clearly mentioned
3. Round seal and initial of the Recommending or credit officer /
manager should be invariably mentioned in each page.
4. Bold Letter/sentences not to be used unnecessarily.
5. Avoid repetition (No same representation of facts to be stated again)
6. No deletion or change in MCB format but addition can be done but in
prescribed format.
7. Keep simple language
8. “NA” to be described as per its relevance like “Not Applicable” or “Not
available”, etc.
9. “:”( colon) not to be used.
10. Segment to be added under name of account ,
Key Note Note to be put up to appropriate/competent sanctioning authority e.g. Branch
Head, RMCC, ZOCC, MCB etc.
Also Agenda needs to be there in case the proposal is being sent to
RMCC/DRMCC/CODD/ZOCC
Fresh/ Depending upon the a/c (Fresh/ RWI/ Renewal) on the right side
Renewal/
Enhancement
Observations Remarks Of the sanctioning authority
Flow of proposal  Date of receipt of proposal at Branch
 Date of receipt of proposal at SMELF/processing office
 Date of receipt of clarification at SMELF/processing office
 Date of putting up to Sanctioning Authority
Introduction of  Name of the Account
Proposal  Branch/Region/ Zone
 Industry/Activity/ Classification
 Internal Credit Rating
 External Credit Rating
 Exposure to the Company/ Borrower Exposure
 Group Name & Group Exposure
 Internal Credit Rating & Date on which it is Based on
Prima-facie If we look at these details we can find that most of these details
required mainly for deciding sanction authority in terms of DLP.
SECTION-I
1.1 a) Gist of the Three things must be mentioned in following way:
proposal 1. To consider Fresh / Review / Review with Increase of following credit
facilities to the captioned company/firm.
2. Period - ___ months subject to Annual Review.
3. Terms and conditions as per appraisal note (for the Branch) “ and
”Annexure D” (for the company)
4. In case of term loan originally sanction for ____ months subject to
annual review/ to be mentioned as “repayment continued in ___
instalment of Rs. __ as per the original sanction”.
5. Repayment of term loan door to door tenor to be mentioned.
6. Instead of “Limits”, “Facility” to be mentioned.
7. In Purpose (optional) for term loans “CAPEX” should be used in case
of capital expenditure.
8. For term loans since the repayment depending upon the cash flow
which always varies, therefore, if required it should be fixed in
ballooning mode instead of keeping it in EMI mode.
9. All the issues involved in the proposal taking from limit to deviation,
modification such as restructuring, change of directors, parking of
limits, etc. should be listed in “Issue for Consideration”.
10. Proposed limit amount should not include any overdue amount in case
of existing account
1.1 b) Proposed concession to be mentioned, if any. It should have details of
To consider Category of concession, whether it is Fresh/ Continue, Applicable Rate as per
following guideline and Concessional Rate proposed by BR/SMELF/ RO/ ZO ,
concession
Concessional rate finally recommended and total Concession Involved,
preferably in tabular format
1.1 (c, d, e) All kind of
To accept c. Deviations: To mention deviation, if considered any. Approval
deviations, obtained from ________, via letter dated ________.
Modification,
d. Modifications: Mention change in any previous sanction T & C for
Confirmations
consideration under review. (Rephasement/ Reschedulement/
Restructuring)
e. Confirmations: Inform about any action already done and seeking
confirmation for same. E.g.: Change in the Company’s BOD, allowing
facility beyond review date.
to be mentioned if any
1.2 (a) Existing sanction details like Date, Sanction No., Authority, Due Date of
Review
1.2 (b) Agreement in Principal (AIP) and Activity Clearance details, if applicable.
1.3 Mention Amount Sanctioned. Gist of sanction, details of sanction, date of
Adhoc/ Excess sanction and liquidation date. Each excess/adhoc’s liquidation date/settlement
date must be mentioned. If any major comments are there for these
sanctions that should also be mentioned there in brief
2.0 Basic Data Asset Classification: Status should be mentioned as of immediate
preceding month of ASCROM
Internal Credit Rating: Last Two-Year Credit Rating
External Credit Rating: Applicable in the case of exposure of more than
Rs. 5.00 Crores. If required & not taken we can ask branch to assign external
rating to any ECAI – External Credit Assessment Institute before
disbursement.
Risk Weightage: A list of risk weights applicable to different asset
category/class is summarized in circular no BCC:BR:107:477 dated 28-09-
2015.
Date of Establishment: As per MOA / AOA/ Incorporation certificate/ CIN
no. etc.
Location – Registered Office / Project Site: As per MOA of company and
other statutory registration of unit.
Group: Should not be mentioned as “Unknown” or “not known”
Key Person: Only one person to be named as key person with designation
who is most influential in business
Industry/ Sector: Industry is the industry in which the firm /company is
dealing in /Sector can be manufacturing or services
Nature of Activity: Activity description
Collaboration / Joint Venture: If Any
Dealing Since: Year of Dealing starts with our bank
Banking Arrangement: It should be mentioned like “Sole”, “Multiple”,
“Consortium” or “JLA” for each facility like TL/CC/BG to be written
individually.
MPBF: Will include both cash Credit and export limit granted as working
capital. It should be for the proposed limit.
Security: Details not required only the type of security along with value of
the security. E.g. Hypothecation of stocks of Rs. 800.00Lacs.
Detail of properties may be mentioned here also for E.g. Measured Land area,
Complete address with identification marks, Valuation & NEC Detail, Present
use of the property etc.
Name of the owner/s. Coverage of security should also be mentioned here.
Primary- The securities which are directly related to business.
Collateral- The securities which are not directly related to business
FACR: It is advised to workout composite FACR in case of Term Loan by
analyzing overall security coverage and the exposure should be collateralized
so that ideal benchmark can be maintained.
2.01 Sole/ Multiple/ Consortium
Banking Opinion on conduct of a/c and credit report status obtained from other bank
Arrangement WC needs to be mentioned. Along with proposed limit and should not be
mentioned as “NIL”
2.02 Need to give our opinion with respect to conduct of account and credit report
Banking status with respect to other banks (in case of MBA). Put remarks that
Arrangement TL sanction letter obtained from other banks and conduct of all accounts is
satisfactory. Conduct of the A/c and repayment of installment established
satisfactory based on information appearing in CIBIL and also statement of
A/cs provided by the client.
 Outstanding amount as on date should be mentioned
 Overdues to be mentioned and tallied with CIBIL
2.03 If any reschedulement done in past 3 years needs to be mentioned along
with justification.
2.04 Details like PAN, Designation, contact number, age, experience of
Name and Directors/Promoters
Details- DIN is Mandatory in case of Ltd. Company and the same has to be verified
Director’s/ from MCA21 portal (To be mentioned as note)
Partner/ If it differs, then we have to ask the company to file the updated returns and
Proprietor submit to ROC.
2.05 Details like PAN, latest Net worth of all the guarantors.
Name and  Total of the Net Worth of the guarantors must be mentioned and
Details – compared with the previous year data.
Guarantors  Major shareholders along with their stake to be mentioned and their
personal Guarantee to be insisted.
 In case of dilution in net worth of guarantors, additional
guarantors/collateral security to be obtained .and in case there are no
additional guarantors, then justification needs to be given.
 Guarantee of Nominee directors not to be insisted upon.
2.06 Applicable only in the case of Company accounts.
Share Holding If the major shareholder i.e., 5-10% of total, are other than the promoters,
Pattern personal guarantee of those major shareholders to be explored or their
shares to be pledged with us.
We have to verify the issued and paid up capital of company from Latest B/s
of the company vis-à-vis MCA21 portal. If amount of capital shown in ABS
varies from the amount of capital shown in MCA 21 the reason required to be
examined and its treatment should be advised in our sanction note.
Also the relationship of the shareholders with the directors to be mentioned.
If we consider the share application money as a part of equity a suitable rider
in consultation with the borrower shall be incorporated in para 8.
3.0 It should have written in brief not more than 5 lines. Any of the information
Background of which is mentioned earlier should not be mentioned in the background again.
the company & Important points like
 Corporate Governance, age of the company and its status as per
MCA21.
e.g. Company is in market for more than --- years enjoying ‘Active’ status as
revealed from MCA21 portal. That signifies that company is regular in filing
the statutory returns in time. Hence governance is considered satisfactory.
 Management, - Company is managed by ____ (promoting directors),
who enjoys satisfactory credit score ranging from ___ to ____, as per
CIBIL. Their credit history, experience, succession planning.
e.g. Company is managed by----- directors led by Mr.--- professional
specialists in their areas enjoying score from – to --. Therefore, considered
ideal, satisfactory moreover Gen Y of the promoters also joining the company
which indicates a sustainable succession planning in addition to inducting
some new professional directors in the area of marketing, technology etc.
 Compliance:
e.g. Company has observed compliance on almost 27 parameters of the
diligence report obtained from M/s------ dt—indicating the fully complained
and very good governance of the company.
 Quality: - Its reputation in market/ISO certification/Sales
returns/rejection
e.g. Company is dealing with Maharatna PSUs of the country which itself is a
testimony of their quality product besides they are possessing ISO
certification valid up to--. Hence company is enjoying quality status of its
products in the market.
 Cliental Network, Company’s Branch network, marketing type etc.
e.g. Since company is in manufacturing sector since long and penetrating into
overseas market that will make a union government mission of MAKE IN
INDIA successful and also it will give boost to the priority sector lending of
the Bank
Brief note on Qualification, Experience, Competency etc. of management should be
Management mentioned in brief.
Quality
(4.0 to 4.9) 4.0) Conduct of the account: Details of the existing account as per the
format to be filled.
4.1) Dealing and conduct of the account- It should be mentioned
“satisfactory”. If not so, we need to justify either in Para 7 or down this table.
4.2) Compliance of Earlier terms and conditions including creation of
charge.
4.3) Documentation: Whether verified by Legal Dept. & whether in order
/enforceable
4.4) Pro-Rata non-fund based business
4.5) Comments regarding utilization of limits. Views on Average Churn vs
Limit utilization.
4.6 Yield in the Account:
1. It is an important information we should compare yield in % with
applicable ROI & it should always be higher than ROI.
2. When our yield is comparatively high it indicates that exposure is
remunerate and there is possibility of cross selling.
4.7) Whether listed Firm: present market quotation - 52 weeks high/ low:
Not listed subsequent to buy back of shares.
4.8) Our Bank’s investment in the firm
4.9) Whether all clearance / approvals have been obtained like Pollution
Clearance and other statutory registrations & licenses.
4.10) Cheque Return details of previous year and current year and
comments on the same.
4.10 Any major inspection irregularities along with branch comments and
present status to be filled in with respect to:
 Concurrent Audit
 Internal Audit
 RBI Inspection
 Statutory Audit
 Credit Audit
 Stock Audit
 Comments of Credit Monitoring Dept.
 Comments of MMR Authority of latest month including their
compliance status must be mentioned here.
4.11 1. Auditors of the company:
Auditor’s As per the Authority letter from the company decided as per AGM of the
Remarks company.
Name and Details like membership number, address to be mentioned and
the status to be verified from ICAI portal.
e.g. The COP of the Auditor has been verified from ICAI portal and found
valid. A print out of the same has been kept on record and then ensured
that he/she is not appointed consecutively for more than stipulated period
under Company’s act (Preferably statutory auditors should not be the
same for over 5 years).
2. Qualification Remarks: Any qualification remark present in Audit
Report should be commented.
3. Whether Statutory Dues have been paid: From footnotes of BS plus
“notes to accounts”.
4. The title of the auditor report should be matched/ addressed with the title
of the firm.
5. To send the gratitude letter to the auditor and also confirm if
they have audited the report or not.
6. The payment of statutory dues for last 3 years to be checked and date of
audit.
Contingent Corporate guarantee if given need to be enclosed here plus any dispute with
Liability tax authorities/other regulatory bodies to be mentioned with their updated
status which can also be checked on their respective websites.
5.0 Compliance Information related to certain compliances
5.1 Check if names of Promoters, Directors, Company, Group Concern figure in
latest:-
 RBI defaulter's list
 Wilful defaulter's list
 ECGC caution list
o For ECGC search we can take the access password from
Regional Office of ECGC or we may seek help from our IBB
Branch who have such password with them.
 CIBIL Report
o CIBIL should be checked and mentioned “Yes” and “In order”
along with score and control number. Proper justification for
any adverse remarks in CIBIL reports to be incorporated.
 CERSAI
 SMA-2 List
5.2 Takeover Norms with compliance to be mentioned in tabular form, if
applicable.
5.3 Details to be mentioned if directors of the borrower company are relatives of
any member of Bank’s Board/Senior Officer of the Bank/Members of any
other Bank Board. Which may be ascertained from the declaration by the
applicant in their worth report in Form No. 135 and the source needs to be
mentioned.
5.4 Details, if any of the Directors of the Bank is Director of the Borrower
Company.
5.5 Exposure to Details if applicable
BOB-7 Account
5.6) Company’s level as per ABS and Indicative Min/Max level as per loan policy or
Compliance of guidelines issued in circulars for;
various ratios  Current Ratio
 DE Ratio(TOL/TNW)
 De ratio(TTL/TNW)
 Average DSCR
 Minimum DSCR
 Promoters Contribution
5.7)  Sectorial cap and Bank, Zone’s Exposure in particular sector including NPA
Exposure to data of the same. These data can be obtained from circular no.
Industry BCC:BR:109:490 and Post MOC data of Bank’ advance available with
(Mention Sector) regional offices.
 Status of Risk in the particular Industry/Sector with respect to our bank
region/zone. If the NPA is higher than the Bank’s NPA in a particular
industry in our Zone/Region then we need to justify why the exposure is
proposed to enhance plus what additional measures we are undertaking
to mitigate the risk.
5.8 Actual Exposure against the exposure cap prescribed for Individual Borrower
Exposure CAP & group as per Circular no. BCC:BR:109:490.
based on Capital
5.9 Compliance with regard to Multiple Banking & Consortium
Arrangement.
(This field is added recently in MCB format vide circular no. BCC:BR:105:46)
6.0  Details to be verified from AS18 & MCA21 portal. We should always verify
Details of about the entities reported by the borrower vis-a-vis entities reported in
Associate/ sister RPT in the Auditor’s Report AS18 (Related Party Disclosure). If they
concerns: are not matching, the name of entities which are not reported by the
borrower as their associates/sister concern but certified by the auditor
then we shall warn the branch to have a close watch to monitor closely
for diversion/siphoning of funds.
 Status of the Associate/ Sister concern accounts, Asset Class, conduct of
account, returns of cheques, if any.
 To verify, if the associate concern/ group concern is given guarantee by
our borrower.
 Trigger: The transactions with RPT entities to be closely watched. It
must be mentioned in Para 8.
 DIN numbers and further details of the directors and their associate
concerns need to be checked and mentioned. Having two DIN for an
individual is a criminal offence.
Financial Highlights of Associate Concern like is to be mentioned and analyzed
briefly
1. Total Revenue
2. Net Profit
3. Paid up Capital/ Partners Capital
7.0 Justification  Point wise justification for all the points mentioned in Issue of
consideration under “Gist of proposal.”
 TERM LOAN- Sales and sanctioned amount should be proportionate and
should also be justifiable with respect to the capacity of the company/firm
like:
 Installed and utilized capacity
 Capex- Capital investment/expenses along with credentials of vendors and
sources, date of DCCO.
 Market- New entrant and new branches details-Credentials of the buyers
and suppliers.
 Installed machinery details along with details of vendors and comparison
with its competitors/peers.
 Raw materials, Infrastructure, Skilled Manpower suitable for the project,
etc.
 Skilled labour and its salary to be compared and also tallied with the PL of
the company.
 Justification for having the current account with any other bank.
 Comparison of Industry performance vis-a –vis peer performance
/competitors and justification, in case, reqd. and also additional demand
of users.
 Our Judgment about the market.
 Period over period (Quarter wise) performance analysis.
 There should not be more than 40-50% utilization in case of new
machinery or project in first two years, for TL.
 Updated position of margin from promoter’s contribution and details of
the funds raised.
 Implementation schedule (Power and other expenses) with updated
position need to be mentioned.
 Change in vendor/suppliers to be mentioned, if any, and justified.
 In case of reassessing TL, the repayment needs to be validated by
checking the ballooning to check the capacity of TL for Greenfield.
 Working Capital- Track record, industry performance and adequate
capacity of labour with the company along with the realistic
estimated/Projected sales to be considered.
 Justification for excess drawings in case the company has availed adhoc/
excess.
 Chart to be prepared for the last 3 years quarter wise.
 Source of margin by raising capital, infusing USL or availing TL to be
mentioned and justified.
 Internal accounting system to be checked.
 Yield and CIBIL record to be linked with justification.
 To be linked with OPM.
8.0 Recommendations:
In view of the facts narrated above and in justification - the projected sales
for the year ending is considered realistic, assessment of WC is separately
made in Section II of this note, we therefore recommend to consider the
issues mentioned in Gist of proposal for a period of ___ months (Subject to
Annual Review) as per the terms & conditions mentioned in “”Annexure D
and Appraisal Note””
Other details if applicable to be mentioned as under e.g.
 Branch to carry out Credit Rating based on ABS 31.03.2016 and if there is
a variance in ABS vis a vis estimated over 10 % then party to undertake
for reviewing the facility at sole discretion of the bank specifically with
respect to resetting of interest rate.
 Borrower to reconcile their accounts especially Trade receivables.
 Branch is advised to assign external credit rating to any ECAI before
disbursement.
 Borrowing company to make the allotment of share application as early as
but not greater than the availment of credit facility. Allotment return
should also filed with MCA 21 when we disburse the facility we must
verify its compliance by verifying MCA 21” and print out of allotment letter
to be kept on record.
 Branch to keep close watch on transactions between related party entities
M/S/Mr/Mrs---- and applicable provision for related party transaction to be
observed vide sec 188 and 189 of the companies act 2013. They must
also obtain a CA certificate who must declare that-
Funds has been raised from ---- through bank A/c No.---- for the purpose of -
---.
 We also certify that the money is utilized for the purpose it is raised.
M/s ---- are reportedly major buyers of the borrowers product it is therefore
advisable to scan the realization track in the A/c periodically at least on
monthly basis to prevent any accommodated sales.
Legal Compliance  Legal Compliance certificate is to be taken in sanction of credit facilities
Certificate including Ad-hoc/Excess limit as per format given in circular no.
HO:BR:105:188 dated 24-08-2013.
 The certificate is to be signed by the officer/executive exercising
discretionary power.
SECTION-II
1.0) Key financials from CMA are to be mentioned here after making proper
classification and assessment.
2.0) To be commented and justified here
Brief comments All financial ratios viz.
on financial  Current Ratio
 DE Ratio
 DSCR etc.
Major Financial Figures viz.

 Receipts/ Sales,
 Net Profit and
 Movement of Net Worth etc.
Comment on Balance Sheet viz.

 Consolidated Financial Position of Company of the company
 Notes to the account
 Provisions not made
 Disputed liabilities
 Bad & Doubtful debts
 Whether statutory payments like PF/ dues to SSI are made
 Any qualifying remarks of the auditors
All these parameters should be analyzed over Y-o-Y basis and any change
needs to be commented with proper justification.
Unsecured Loans-
 Obtain the list of close relatives and establish relation with the client.
 Explore the possibility to make them guarantors and ascertain their net
worth.
 The liquid worth available with them must always be higher than the
amount expected to be raised from that.
 The money so expected must be brought in through banking channel.
 Based on the above examination we shall warn our operating units
Cash & Bank Balance-

If A/c maintained with other Bank then we shall ascertain reason of
maintaining A/c with another bank stipulating that-
 A/c with other bank should be maintained only as a collection A/c.
 Borrower will undertake to revive the collection amount on regular
interval. It will be decided with mutual consent.
 A/c statement of the A/c will be submitted on quarterly basis.
3.0) Working Working capital is derived by three methods as under:
Capital A) WC assessment for Micro & Small Enterprises as per Regulatory
Assessment definition where FBWC requirement is up to Rs.5.00 crores:
1) WC limit is assessed at 25.00% of the accepted projected turnover and
margin of borrower to be 6.25% of the accepted projected turnover or actual
NWC whichever is higher (for Non-digital mode sales transactions).
2) WC limit is assessed at 30.00% of the accepted projected turnover and
margin of borrower to be 7.50% of the accepted projected turnover or actual
NWC whichever is higher (for Digital mode sales transactions).
3) The assessment has to be carried out, both under turnover method as
mentioned above and also by First Method of Lending and the limit higher of
the two must be sanctioned for new as well as existing units.
B) WC assessment for Micro & Small enterprises where FBWC
requirement is above Rs.5.00 crores and Medium Enterprises as per
Regulatory definition :
1) The WC requirement will be computed on the bases of minimum 20% of
the accepted projected annual turnover or First method of lending, whichever
is higher is to be sanctioned for new as well as existing units.
C) WC assessment for MSMEs under Non-Regulatory definition:
1) The assessment of working capital limits should be done based on second
method of lending only i.e. as per Tandon committee guidelines.
WC assessment based on above applicable method worked out to be Rs. ---
and therefore, we recommend a need-based combo cash credit of Rs. -----
and monitoring / drawings in the A/c shall be strictly based on the monthly
stock statement and receivables.
3.1 Brief Note on WC Assessment
3.2 Comments on Holding Level
3.3 Export Limits, Inland BP/ BD, Etc.
3.4 NFB Facilities
4.0 REQUIREMENT OF OTHER FACILITIES: Term Loan
 Existing Term Facilities/ DPG
 Fresh Term Facilities/ DPG
 Term Loan Under Project Finance- Purpose
 Appraising Agency
 Summary of cost of project and means of finance/ Promoter's
Contribution
 Cost of Project & Means of Financing
4.1 Summary of cost of project and means of finance/ Promoter's
Contribution
 Cost of Project
 Means of Financing
 Sources of Promoter's Contribution
 Status of tie-up of loan
4.2 Brief explanation for each major individual item of cost of Project
with present status along with comments on the competitiveness
 Land Details
 Building & other civil construction
 Machinery Details:
 Other Items
4.3 Brief Project Financial Details
 Promoters contribution
 Debt equity ratio of the project
 Minimum DSCR of the Project
 Average DSCR of the Project
 Break Even Point
 Cash Break Even Point
 Repayment Period
 IRR
 Sensitivity Analysis
4.4  Status of various statutory approval & clearances (Pre & Post
Implementation stage)
 Present physical & financial status of project, if any
 Implementation schedule
 Technical & Economic Feasibility
 TEV study comments
4.5 Infrastructure, Utilities & Facilities
 Power
 Water
 Transport
 Operating Personnel / Manpower
 Capacity utilization
 Marketability
SECTION-III
1.0 Risk and Industry Analysis
2.0 Risk Analysis
3.0 SWOT Analysis
ANNEXURE
Annexure Contents
A Major shareholders of subsidiaries/group concerns
B Name and business experience of Directors and promoters
C Background of firm
D Detailed Terms and Conditions
It should have
 Limit (Remarks, if any for this limit)
 Purpose
 Primary Security & Facility specific Collateral Security, if any
 Margin (%)
 Period
 Interest/ Discount/ Commission
 Repayment Period
 Repayment Schedule
 Security Documents
 Terms and Conditions for this Facility
 Common Collateral securities & Personal/Corporate Guarantees
 General/ Common Documents
 Pre-Disbursement Conditions, if any and Special conditions, if any
 Other Terms and Conditions
E Operating Statement
F Analysis of Balance Sheet
G Cost of project and Sources of finance
H Funds flow statement (additional data for three years for fresh T/L and DPGs
only)
I Record of Business turnover
J Group concerns and their banking arrangements
K Major adverse features pointed out by RBI Inspectors/Internal Auditors/
Statutory Audit/ Credit Auditors/ Concurrent Auditor and steps taken
L Minutes of Consortium Meeting
M Appraisal note for sick units
N DSCR Calculation
O Project Details
19. MSME PRODUCTS
1. SME Short Term Loan:

Purpose:
SME Short Term Loan is to be sanctioned to fulfil borrower’s temporary
shortfall/mismatch in liquidity, for meeting genuine business requirements only, not to
be made available for other purposes like repayment of loans of other banks or
institutions, unsecured loans etc. or for any purpose not related to the borrower’s
activity.
Borrower Group:
It can be sanctioned to borrower comer under MSMEs category as per
Regulatory/expanded definition. However borrowers falling under Real Estate sector,
Power Sector, Education sector IT sector are not eligible.
Eligibility Criteria:-
Borrower should have satisfactory dealing with Bank since last 3 Years.
Satisfactory credit rating for the last three years (BOB-5 and above) and for 4 half
years in case of accounts where credit rating is done on half yearly basis.
Accounts with continuous decline in credit rating will not be considered eligible.
Minimum Asset Coverage Ratio of 1.25 is required under this scheme.
Satisfactory dealing with the bank for at least -3- years.
Borrower having more than 10% Negative variance in term of sales/turnover and profits
will not be considered eligible.
No major Inspection/Audit irregularities persist.
Loan amount:-
Limit will be 25% of the existing Fund based Working capital limits in case of BOB-1,
BOB-2 and BOB-3 rated accounts, and 20% in case of BOB-4, BOB-5 rated
accounts, subject to a minimum of Rs. 10 Lakhs and maximum of Rs. 250 Lakhs.
Note:- Adhoc facility and short term loan cannot be concurrent.
Period
It is to be repaid in 12 months including moratorium period. Interest to be served as
and when charged.
25% concession in the applicable charges will be provided in Unified processing, Upfront
& Documentation charges under this scheme.
Sanctioning Powers :-
Powers to sanction vested with Regional Manager and above only provided there is no
Ad Hoc excess is allowed in the account.
Proposals for Short Term Loan need not be referred through SME Loan Factory.
Time Limit to Sanction:-
The proposal should be disposed off Maximum within 10 working Days.
Rate of Interest:-
No Product specific interest rates. As per the general interest rates applicable to MSME
regulatory and SME expanded categories.
Security:-
1st charge /Equitable mortgage of fixed assets of the company /firm or extension of
existing first charge/EM of fixed assets.
In case of extension of mortgage is likely to take time, Zonal Head is authorized to

waive this condition on case to case basis if requested by borrower.
2. SME MEDIUM TERM LOAN

Purpose: -
To augment enterprises working capital gap and to help in improvement of current
ratio and also for meeting genuine business requirements.
The facility will also be available for repayment of secured and unsecured Loans of
other banks or institutions, but not for any purpose, which is not related to the
enterprises activity.
Borrower Group:
It can be sanctioned to borrower comer under MSMEs category as per Regulatory
definition and other entities with their annual sales turnover of Rs. 1/- Crore to Rs..
150/- Crores and new infrastructure and real estate projects, where the project cost is
up to Rs. 50/- Crores
Borrower should have satisfactory dealing with Bank since last 3 Years.
Satisfactory credit rating for the last three years (BOB-4 and above) and for 4 half
years in case of accounts where credit rating is done on half yearly basis.
Accounts with continuous decline in credit rating will not be considered eligible.
Minimum Asset Coverage Ratio of 1.25 is required under this scheme
Borrower having more than 10% Negative variance in term of sales/turnover and profits
will not be considered eligible
Average DSCR should not be less than 1.75:1
D.E. Ratio( TOL/TNW) should not be higher than 4.5:1 and TTL/TNW should not be
more than 3:1.
No major Inspection/Audit irregularities persist.
Loan Amount:-
Limit will be 25% of the existing Fund based Working capital limits in case of BOB-1,
BOB-2 and BOB-3 rated accounts, and 20% in case of BOB-4 rated accounts,
subject to a minimum of Rs. 25 Lakhs and maximum of Rs. 500 Lakhs.
Period:-
Not exceeding 36 months repaid in equal quarterly of half yearly instalments.
Security:- 1st charge /Equitable mortgage of fixed assets of the company /firm or
extension of existing first charge/EM of fixed assets.
Rate of Interest :-
As per credit rating rating for the additional loan to be granted under the scheme .
Unified Processing, Upfront & Documentation:-
25% concession in the applicable charges will be provided in Unified processing, Upfront
& Documentation charges under this scheme. If loan is prepaid within -24- months of
drawdown prepayment penalty of 1% is to be recovered.
Sanctioning powers
Sanctioning power under this scheme is as under;
1. In centres where SME Loan factories are located, proposals should be routed
through SME Loan factory and powers to sanction will be as under:
Factory Head in the rank of CM Up to Rs. 62.50 lacs.

Factory Head in the rank of AGM Up to Rs. 250 lacs
In case factory Head is in the rank of CM/AGM and branch head is in the rank of
AGM/DGM, request will be processed by factory and sanctioned by Branch Head.
2. At other centres proposals can be sanctioned by Branch Heads as per Sanctioning

powers as under which are co-extensive with powers for sanction of ad-hoc facility.
Branch Head in Scale III Up to Rs. 25/- Lacs

Branch Head in Scale IV Up to Rs. 62.50 Lacs
Branch Head/ Executives, i.e. DRM, RM in Scale V Up to Rs. 250/- Lacs
3. Powers of executives in the rank of scale VI & above
Branch Head/ Executives, i.e. Regional Heads, Zonal Up to Rs. 375/- Lacs
Heads in Scale VI
Zonal Heads/ GM (Corporate Office) Up to Rs. 5/- Crores
Branch Head in Scales I and II to refer proposal to their Regional Head.
Time Limit for Sanction:-

The proposal within branch powers should be disposed off maximum within 5 working
Days and maximum within 10 working days if proposal comes under beyond branch
powers.
Other Provision:-
Credit audit to be carried out as per extant guidelines.
3. BARODA VIDYASTHALI LOAN
Purpose:
Under this product the loan/facility is provided for Construction of building including
expansion, modernization & renovation activities of the education institution for the
purpose of education.
Purchase of instruments meant for imparting Education / Training to the students,
Purchase of Vehicle for the use of the educational institutions.
Finance for purchase of land alone is not permissible. However, if the land cost is
included in the total cost of project, the same can be financed. However, land cost
should not be more than 20% of the total project cost and an undertaking to be
obtained that building construction will be completed within a period of 2 years.
Overdraft for meeting short term fund requirements based on Cash budget provided the
institution is profit making and does not have any other Bank liability.
Vehicles can be financed under the scheme for the use of the institutions.
Activity Clearance guidelines are applicable for vehicles finance also under the scheme.
Proposal under this scheme is considered to Educational institutions, Schools, Colleges
and other education bodies running education activities set up by Firms, company,
Trusts, Society etc. (except HUF).
Financial Ratio:-
Current Ratio In case of OD 1.17 (MSE)
1.20 (ME)
1.33(Expanded definition)
D.E. Ratio TTL/TNW
TOL/TNW
DSCR AVERAGE 1.75
DSCR should not go below the level of 1.25 in any particular year.
Nature of facility:-
Term Loan /Overdraft.
Limit:-
Minimum: Rs.25.00 Lakhs and Maximum: Rs. 15.00 Crores
OD Limit to be allowed only to existing profit making institutions without any bank
liability for meeting short term requirement against fee receivable for one semester with
25 o/o margin and security of mortgage of assets in the name of the institution or
promoters of the institution as the case may be.
Assessment cash budget system. OD to be liquidated in maximum period of 6 months

out of fee collection and may be allowed max. 2 times a year.
Security:-
Equitable mortgage of Land & Building of educational institute (not agricultural land) is
compulsory except where land & building of an educational institution cannot be
mortgaged due to restriction from AICTE, Local Govt. Laws/guidelines, however in such
case alternate collateral security in the name of the institution or promoters of the
institution of at least equivalent value to be obtained.
However, and undertaking to be obtained from the borrower that no charge will be
created on the property belonging to the educational institution and the same to be
kept under negative lien.
When credit facilities exceed Rs.10.00 Crores, Collateral security level should not be less
than 30% by way of Land & Building other than college/school property i.e. personal
property be obtained. Any deviation in this condition will be under authority of ED/CMD
only.
Personal guarantees of the Promoters of the Institution are to be obtained. If personal

guarantee of some promoters is to be waived, Regional authority’s clearance is to be
obtained.
Margin:-
Overall minimum margin of 25% of cost of project.
Rate of Interest:-
At present (BCC:BR:108:209 DATED 12.05.2016)
ROI as under or as per credit rating whichever is lower

Up to Rs. 5.00 crore (MCLR+SP) + 0.75%
Above Rs. 5.00 crore & up to Rs. 10.00 crore (MCLR+SP) + 1.25%
Above Rs. 10.00 crore & Up to Rs. 15.00 crore. (MCLR+SP) +2.00%
Repayment Period:-
Maximum 84 months (Incl. Max moratorium up to 2 years). However Repayment period to

be decided based on project cash flow.
Unified Processing, Upfront & Documentation:-
75% of the applicable charges. (25% concession)
TEV Study:-
TEV study May not be carried out irrespective of project cost.
Activity clearance:-
Up to Rs. 1.00 crore Regional Head

Above Rs. 1.00 crore & up to Zonal Head
Rs. 2.00 crore
Above Rs. 2.00 crore. ED/MD
Other Conditions :-
Audited Balance Sheet and Profit & Loss or income - expenditure statement for the last 3
years in case of existing Institution.
Project report in case of new Project.
Credit rating of the account to be carried out as per bank's extant guidelines and the
borrowers with credit rating of BOB-6 and above only to be financed under the Scheme.
All other terms and conditions as per bank's Domestic Loan Policy issued from time to
time.
Advances under the scheme will be classified as SME Regulatory/SME (expanded definition)
as the case may be.
4. BARODA AROGYADHAM LOAN
It can be sanctioned to borrower comer under MSMEs category as per

Regulatory/expanded definition provided that Promoters should have requisite qualification
in any branch of medical science from a recognized University and should have minimum 2
years of work experience. However borrowers falling under Real Estate sector and where
promoter or owner is HUF are not eligible
Proposal under this scheme is considered for the purpose of setting up of new or
Expansion/renovation/modernization of existing Nursing Home/ Hospital/ Pathological
Laboratory/ Diagnostic Centers, Purchase of medical diagnostic equipment as also
office equipment, viz. computers, air conditioners, office furniture, etc, Purchase of
ambulance or to meet working capital requirements by way of overdraft.
Maximum Limit under the scheme is depend upon the branch location i.e.
Rural Rs. 0.50 Crores

Semi Urban Rs. 6.00 Crores
Urban Rs. 12.00 Crores
Metro Rs. 15.00 Crores
Term loan can be sanctioned 35 months to 84 months including moratorium, subject to

annual review
or
10% of the annual sale or gross income, or
20% of the above ceiling limit in case of borrowers requiring both Term Loan and working
capital facilities.
In case of only working capital requirements, limit to be restricted to 20% of the above
ceiling limit.
If finance exceeds Rs.5.00 Crores, Minimum collateral security of 30% should be
obtained (No HUF property be obtained as collateral security)
Uniform margin of 25% on the chargeable assets as per Project details.
25% concession in the applicable charges will be provided in Unified processing, Upfront &
Documentation charges under this scheme.
5. BARODA OVERDRAFT AGAINST LAND& BUILDING
Proposal under this scheme is considered to meet fund based working capital requirement
(by way of overdraft only) of borrower under MSMEs category as per Regulatory (except
retail trade)/expanded definition. MSMEs as per expanded definition or regulatory definition
(except retail trade) established in the line of business for a minimum period of 2 years and
financed/proposed to be financed under sole banking arrangement.
Limit: Minimum Limit should be above Rs.10.00 Lakhs and maximum limit will be as under
(Rs. In Lakhs)
Rural 100.00
Semi Urban 500.00
Urban & Metro 1000.00
Facility will be allowed by way of Overdraft. However, sanctioning authority may allow Non-
Fund based Working Capital facilities, by earmarking the Overdraft limit
Sanctioning authority can grant Ad Hoc limit up to 10% of sanctioned limit for one
month if within DLP of the branch and not to exceed three times in a year, at 1%
additional Rate of Interest on the Ad Hoc amount provided account is having satisfactory
conduct and turnover.
Assessment of the limit will be carried on the basis of 40% of the distressed value of
property mortgaged.
Unified Processing upfront & Documentation fee will be calculated at the rate of Rs. 200/-
per Lac with a maximum of Rs. 85000/- for all borrowers and in case of exporters
Maximum Rs.28000/-. If BG/LC is sanctioned as sub limit of total limit by earmarking in FB
limits then charge will be calculated as 50% of the applicable charges
Accounts covered under this scheme Stock/ Book Debts statement to be obtained on
yearly basis, i.e. February every year. This being a collateral security, certification by
Chartered Accountant is not mandatory.
Asset Coverage Ratio should be 1.50 for considering the proposal under this scheme.
6. SCHEME FOR PROFESSIONALS
This scheme is meant for Professionals in any discipline viz. Engineers, Architects, Interior
Designers, Photographers, Financial Consultants (CA/ICWA/CS), Advocates and
specialized qualified service providers. Proprietorship/ Partnership/ Pvt./Public. Ltd.
Companies with
 Minimum ITR - taxable income of Rs. 1 Lakh
 Minimum experience of 3 years in their respective fields
 Minimum bureau score of 760
Facility can be granted for the working Capital Requirement, Purchase of equipment,
Expanding/ Renovating Business premises and also as Non-fund based facilities (Bank
Guarantee and Letter of Credit).
The limit under the scheme can be sanctioned ranging from Minimum Rs. 10.00 Lakhs to
Maximum Rs. 5.00 Crores. Term Loan granted should be for maximum period of 84 Months
including moratorium period.
Limit will be assessed as mentioned under

For working capital facility: As per First Method of Lending or 20% of turnover
whichever is higher for limits up to Rs. 500.00 Lakhs,
TL/DL for purchase of land & building and Plant & Machinery taking into
consideration margin of 20% for plant and machinery and 25% for land and building
repayable in 7 years (including moratorium), based on the cash flow projections.
Average DSCR for term loan is to be 1.75
Margin under the scheme will be as under

For Cash Credit:
25% against stocks & Book Debts up to 90 days only
For Term Loan/Demand Loan:
25% on land and building 20% on Plant and Machinery
35% on second hand Plant & Machinery
For non-fund based limits:
Cash Margin on guarantee and L/C facility should be minimum 20%.
Collateral Security: For loan amount above Rs. 2 Crores, mandatory collateral security
should be 25%.
7. BARODA SME LOAN PACK
Proposal under this scheme is considered of borrower exclusively dealing with BOB and
are under MSMEs category as per Regulatory (except retail trade) and all other entities
with their annual sales turnover up to Rs. 150/- Crores and non-real estate projects
where the project cost is up to Rs.100 Crores.
This scheme is meant to provide hassle free credit for working capital (fund based and
non-fund based) as also capital expenditure related to the business of the borrower
within the overall composite limit sanctioned to the borrower.
Composite limit is calculated as 4.5 times of borrower’s tangible net worth as per last
audited Balance Sheet, or, Rs. 10.00 Crores, whichever is lower. Term Loan can be
sanctioned within overall composite limit for maximum period up to 7 Years.
Margin under this scheme will be 25% on all the facilities
While assessing the comprehensive credit line the sanctioning authorities would take into
account the nature of business, cyclical trends, peak time requirements, cash flow
projections, and any eventuality of unforeseen spurt in the business. The comprehensive
credit line would be overall exposure limit as such the extent of all the facilities used by
borrower/delivered to the borrower would not exceed the credit line limit and working
capital limits within the composite limit should not exceed the eligible bank finance as per
Nayak Committee recommendations.
8. BARODA SME GOLD CARD
Proposal under this scheme is considered for MSME Borrowers (regulatory) and SME
Expanded rated BOB-5 & above and having sole banking arrangement with working
capital limit of Rs. 25 Lac & above. It is provided to meet emergent requirements and tie
up temporary mismatch in liquidity arising out of delayed payment by buyers, tax
payment etc. and fulfilling conditions.
In case of existing accounts-

i. A/c in Standard Category for last 2 years
In case of Take Over accounts:-

i. No deviation allowed in Take over norms while taking over account
ii. Eligible for the facility only after one year of takeover of the a/c
Working capital limit is provided under this scheme maximum up to 10% of the assessed
MPBF. However it may be sanctioned for period of 12 months and to be allowed on 4
occasions during the year for a maximum period of 2 months on each occasion.
However, there should be a minimum gap of 15 days between two drawals.
9. MSME CAPEX LOAN AND CAPEX CARD
Proposal under this scheme is considered for MSME Borrowers (regulatory) and SME
Expanded rated BOB-5 & above
The manufacturing/service sector units should have been established in the line of activity
for a minimum period two years, Account running with satisfactory dealings for last one
year & above and No adverse features are reported in conduct of account
The loan to be considered for the following capital expenditure related with the regular
business activity:
 Replacement of old machinery.

 Purchase of balancing equipments
 Modernization.
 Investment in Research and Development.
 Installation of captive power plants and Upgradation of technology.
 Alteration in layout of factory/office.
 Acquisition of software, hardware, and tools, jigs, fixtures etc. forming part of
Plant & Machinery.
 Purchase of cars, passenger cars for staff and other vehicles for use of business
purpose.
Limit will be asses as mentioned below

 25% of gross Block of Plant & Machinery for MSME(Mfg.) as per last Audited Balance
Sheet or 10% of the working capital for service sector based on DSCR and
subject to cap -
 Baroda MSME Capex card: Min. Rs. 25 lacs and Max Rs.5.00 Crore.
 Baroda MSME Capex Loan: Min Rs. 25 lacs and Max Rs. 2.00 Crore.
Repayment period allowed from 3 to 7 years including the moratorium period.
MSMSE Capex Card is sanctioned at the time of sanction/ Renewal of facilities, however
MSME Capex Loan will be considered Where Capex card limit has not been considered
(and not rejected) at the time of Regular sanction - instantly as per need.
Margin: - Land & Margin: - 30%
Plant & machinery: - 25%
10. BARODA LAGHU UDYAMI CREDIT CARD
The scheme is applicable to all existing customers in the categories of small business,
Retail Credit, Artisans, Village Industries, Small Scale and Micro Enterprises units,
professionals and self employed persons, etc., .
Maximum limit under the scheme is allowed up to Rs. 10.00 Lakhs. The borrowers
having credit limit up to Rs.10.00 Lakhs and satisfactory track record/dealing with the
Bank for the last 3 years are eligible to avail the facility of BOB Laghu Udyami Credit
Card (BOBLUCC) i.e. converting the existing account to BOBLUCC account. The limit fixed
under the scheme will be valid for a period of -3- years, subject to internal annual
review based on the conduct / operations of the account. Wherever required,
enhancement in Credit Limit within the ceiling of Rs.10 Lakhs will be considered without
submission of a detailed proposal by the borrower.
Assessment of credit limit will be done as mentioned below;

For small business, retail traders, etc., 20% of the annual turnover declared for tax
purposes or last 12 months turnover in the operative account, whichever is higher. In
respect of parties with good track record, where sales tax returns are not available, the
credit limits may be decided taking into consideration the actual turnover in the
account during the last two years.
For professionals and self-employed persons, 50% of their gross annual income as
per IT return shall be considered as the limit for issuing the BOBLUCC.
For Small Scale industrial Units including tiny sector units, the assessment norms in
vogue as per the Nayak Committee recommendations would continue.
11. BARODA ARTISANS CREDIT CARD
All artisans involved in production/manufacturing process (and otherwise eligible for

credit facility for carrying out the proposed activities under any of the existing bank’s
schemes) would be eligible under this scheme.
Beneficiaries of other Government sponsored loan schemes will not be eligible for
coverage under BACC scheme.
All existing artisans borrowers of the bank enjoying credit facilities up to Rs. 2/-
lakhs and having satisfactory dealings with the bank will be eligible to avail credit
facilities under the scheme. This would enable them to get limit sanctioned for a three
year period as also benefit from simplified procedures stipulated for availment of credit.
The credit limit would be fixed based on assessment of working capital requirements as
well as cost of tools and equipments required for carrying out manufacturing process.
For evaluating working capital requirements, the norms adopted as per Nayak
Committee recommendations (20% of anticipated turnover) are to be followed.
The maximum limit to be sanctioned under the scheme would be Rs.2/- Lakhs.
Margin for limit up to Rs.25000/- will be nil however for limit above Rs. 25000/- up to Rs.2/-
lakhs will be 15% to 25%
12. BOB Weaver MUDRA Scheme
The scheme is meant for providing adequate and timely financial assistance from the Bank
to the Existing or experienced Handloom Weavers involved in weaving activity to meet their
credit requirement i.e. for purchase of looms and related capital expenditure and need
based working capital requirement.
Maximum Limit under the scheme will be Rs. 5.00 Lakhs (Inclusive of Demand Loan and
W.C. finance)
Margin will be 20 % of total project cost (Capital Expenditure & W.C) Margin up to
Rs.10000/- or 20% whichever is less shall be provided by GOI.
Assessment of Limits
Demand Loan: 80% of cost of Looms and other accessories / capital
expenditure
Working Capital limit: Bank finance will be 20% of estimated / projected turnover less
margin.
13. BARODA MSE GENERAL CREDIT CARD
Any individual taking up non-farm entrepreneurial activity across the country will be eligible
to get finance under the scheme. However Individuals will not be eligible for “Baroda MSE
General Credit Card” if he/she has been issued any type of credit card such as BKCC, BACC,
BWCC, LUCC, BOBCARD, Any other type of credit card etc. except the Cards for
consumption needs.
Facility can be provided to fulfill Working Capital Requirement, Financing new project/
expansion of project and Non-fund based facilities for minimum limit of Rs.1000/- to
Maximum limit of Rs. 1.00 Lakh. Term Loan can be sanctioned for maximum 7 years.
14. SCHEME FOR FINANCING EXISTING BORROWERS UNDER SME SEGMENT

FOR PURCHASE OF NEW VEHICLES
Proposal under this scheme can be considered of Proprietorship firms, Registered
Partnership concerns, Limited Liability partnership firms, Private Limited Companies,
Limited Companies, Trusts, Co-operative Societies (Except individuals) under SME
Segment with Internal credit rating up to BOB-6 in CRISIL model in case of borrowers
enjoying credit limits over Rs.25 Lakhs (to include regular limits enjoyed by the Borrower
and proposed loan for purchase of vehicles) for acquiring any type of new vehicle
eligible for Registration with Regional Transport Authority up to the limit of Rs. 200
Lakhs maximum.
The scheme will be applicable for takeover of existing vehicle loans availed by our
existing SME borrowers with credit rating up to BOB 6 subject to following:
 There is no overdue with the existing lender.

 Vehicle is not more than 3 years old.
 All other norms of the scheme are complied with along with takeover norms.
Margin of 10% of total cost of transport vehicle i.e. inclusive of initial insurance
premium, RTO Tax, Octroi, body building charges & other incidental charges in case of
new vehicle will be required.
Facility can be sanctioned up to period of Maximum 60 months subject to review every year.
The facility to be included in the regular review proposal.
50% concession in applicable processing charges will be provided in this scheme.
In order to expedite the decision, the specific discretionary lending powers have been
delegated to the following sanctioning authorities to consider the proposals under the
scheme irrespective of the size of other limits enjoyed by the borrowers:
 Accounts falling beyond powers of Branch Heads & up to the powers of Zonal Heads
sanction will be accorded by Deputy Regional Manager/ Regional Manager and
 Accounts falling beyond the powers of Zonal Heads sanctioning authority will be
Zonal Manager
15. BARODA LOAN TO BUSINESS CORRESPONDENTS
The product is specially designed for Business Correspondents (BCs) and Kiosk Operators of
age between 18 to 60 years, who have valid agreement with service providers engaged by
our bank for the purpose of providing banking services under financial inclusion.
Total limit can be sanctioned under the schemes below

( Amt. In Rs.)
Area Demand Overdraft (Working Term Loan Total
Loan capital) (vehicle loan)
Rural and semi 75000/- 25000/- 50000/- 150000/-
urban
Urban 115000/- 35000/- 50000/- 200000/-
Metro 150000/- 50000/- 50000/- 250000/-
Purpose and Repayment period:

 Demand Loan: To purchase computer hardware, laptop & peripherals, including
printers, biometric scanners etc, furniture and setting up or renovation of office
Repayable in maximum 36 equated monthly instalments commencing from one month
after date of disbursement of loan.
 Overdraft: To meet Working Capital requirement i.e. cash management requirement
for processing of day to day FI transactions through settlement account of BC
Repayable on demand subject to annual review.
 Term Loan (Vehicle): For pu rch ase of n ew brand v eh icle (mot or cy cle)
Repayable in maximum 60 equated monthly instalments commencing from one
month after date of disbursement of loan.
 The facility may be covered under CGTMSE.
16. COMPOSITE TERM LOAN SCHEME
Proposal considered under this scheme of Units eligible to be classified as MSME as

per MSMED Act 2006 (Regulatory MSME) for the purpose of Fixed capital investment and /
or working capital requirement as Composite term loan of maximum Rs.100 Lac.
in case of composite loan upto Rs. 25,000/- the margin is NIL and 15% - 25% in case of
composite loans above Rs. 25000/- and up to Rs. 100/- Lakhs.
Repayment is to be done in Minimum 3 years and maximum of 10 years, with initial holiday
of 12 months to 18 months, both for interest and principal.
Moratorium period should be 18- months in the case of the new units. It could be reduced
upto -12- months in the case of artisans / other small units who are already reasonably well
established and who are expected to have sufficient viability to commence repayment
somewhat earlier
The quantum of loan to be sanctioned in each case should be need based.
Requirement of one operating cycle should be liberally assessed and a contingency of 10%
to 20% should be added to it. Such contingency portion should be disbursed in case of
unforeseen contingency due to operational bottleneck or some consumption requirement
No collateral security/third party guarantee should be taken for account covered under this
scheme. Working Capital loan should be availed within one year from the date of
commencement of production. The unit should open a current account with us and the
amount of working capital of the loan will be credited as and when disbursed. The unit
should route its entire transaction of the business including all the receipts and payments
through this account only. The unit should provide monthly stock statement showing the
position of inventory level.
17. BARODA E- BUSINESS PACK
It is sanctioned to eligible borrowers by way of Overdraft / Demand Loan / Term Loan /

Composite Loan for Working capital requirement / financing capital expenditure to MSME
Regulatory etc.
Few specific features of this product is as under-
 Minimum 10% of the total sales of last 6 months should be by way of digital mode.
 Promoter's equity of minimum 0.333 times (1/3 of ihe credit facilities) requested
above Rs.10/- Lac (DE Ratio should be maximum 3:1).
 Collateral coverage stipulated at 50% for few specific borrowers.
 0.25% concession on applicable rate of interest as per bank's extant guidelines will
be allowed subject to minimum interest @ MCLR + SP.
 Stock / Book Debts statement to be obtained on yearly basis, i.e. as of last day of
February, by 10th of March every year- Stock Audit is not applicable.
 Repayment / installment of Demand Loan / Term Loan will be on EMI basis.
 Separate Demand Loan account will be opened for TOP UP Loan and repayment to
be maximum up to 36 months (including moratorium period). The overall tenor of
Loan should not exceed tenor of originally sanction.
18. SCHEME FOR FINANCING TEXTILE UNITS
Few salient features of this product is as under-

 Limit between Rs. 25.00 lacs to Rs. 25.00 crores.
 Assessment of limits should be independent of TUFS subsidy.
 Maximum repayment period for term loan, inclusive of moratorium, 9 years.
 Deviation Authority- COCC-ED.
 50% of actual intersol, inspection, processing, remittance charges would be
applicable.
 For exposure above Rs.10/- crores- minimum 40% collateral security- other than
fixed assets of the unit charged to the Bank- is stipulated.
 Book Debts up to tenure of 120 days to be financed.
 TEV Study in case of existing units going in for expansion is waived.
19. BARODA OVERDRAFT FOR ECOMMERCE BUSINESS
Clean overdraft from Rs. 100000/- to Rs. 2500000/- for working capital needs of merchants
engaged in online selling to etailers. Loan application to be processed by Specialised
Product Processing Cell, Fintech, BCC. Rate of interest stipulated at 1.85% over 12M
effective MCLR.
BCSBI – Action Points for MSME Borrowers:-
Following actions points are regard to loan applications of MSME segments to comply with
BCSBI.
a. To devise loan applications with a built in acknowledgment indicating period within which
the customer can expect its disposal.
b. To provide Scheme specific MITC (Most important Terms & Conditions) for loans with the
respective loan application form.
c. The specific reason for rejection should be advised to the applicant in writing. To ensure
compliance, this should be part of the application form only.
The time norms for disposal of applications are to be reckoned from the date of receipt of
loan application which is complete in all respects.
Please refer
Circular no. BCC/BR/109/119 dated 28-02-2017
Circular no. BCC/BR/109/169 dated 31-03-2017
Circular no. BCC:BR:109:253 dated 18-05-2017
20. RISK ADJUSTED RETURN ON CAPITAL EMPLOYED (RAROC)
Quick Bites:
 Introduction & Applicability of RAROC
 RAROC as a Concept
 Implementation of RAROC
 Key Terms of RAROC
Managing our loan portfolio in a way that optimizes our shareholders’ return through adequate
pricing has gained greater importance in recent years. It is desired that profitability is
commensurate to the risks and capital charge associated with the assets. With this objective in
mind it has been decided to introduce the evaluation of Risk Adjusted Return on Capital (RAROC) in
appraisal of all credit proposals. The risk-adjusted return on capital (RAROC) calculation is based on
the trade-off between risk and return, or in other words it is a risk-based profitability measurement
framework for analysing risk-adjusted financial performance and providing a consistent view of
profitability. If RAROC is higher than the hurdle rate then the loan is pointed as value adding, and
bank capital ought to be allocated to the activity. The concept was developed by Bankers Trust and
principal designer Dan Borge in the late 1970s.
In its simplest definition, risk-adjusted return is of how much return your investment has made
relative to the amount of risk the investment has taken over a given period of time. If two or more
investments have the same return over a given time period, the one that has the lowest risk will
have the better risk-adjusted return. So if we summarize all of the above definition, RAROC is
basically a framework to evaluate whether the credit risk asset generates adequate
profit to add economic value to shareholders' funds.
Ref: Circular No. BCC:BR:109:171 dated 03-04-2017
EXEMPTIONS TO RAROC FRAMEWORK:

In our bank few exposures are exempted from calculation of RAROC in decision making
 Sanctioned limit towards derivatives exposures.
 Schematic lending irrespective of ticket size, including advances under our retail lending
schemes.
 Credit Risk in respect of exposure under regulatory instance e.g. RIDF funds to NABARD etc.
 Exposures backed by 100% cash collateral (as per Basel II/ Basel III definition of financial
collateral).
RAROC AS A CONCEPT:
As per Basel II/ Basel III definition of RAROC is defined as the ratio of risk adjusted return to capital
employed. The capital employed may be Regulatory Capital as prescribed by the regulator or
Economic Capital computed by the bank as per its own policy and methodology. However in our
implementation, regulatory capital is considered as capital employed.
RAROC = Risk Adjusted Net Income/ Capital
Where, the numerator:

Risk Adjusted Net Income = Revenues (Gross Interest Income +Other fees,
commission etc.) - Fund transfer Pricing Cost - Expected Credit Losses
And, the denominator:
Regulatory capital employed for the credit exposure, for the financial year 2017-18 is
10.875% of the Risk Weighted Assets as per Master circular on Basel III capital regulations
The RAROC approach requires that the RAROC so computed be compared to a pre specified hurdle
rate, and credit exposures for which the RAROC exceeds the hurdle rate, only be sanctioned. It is
assumed that credit exposures below the hurdle rate do not add economic value to the
shareholders' fund, and rather causes economic erosion. The Hurdle rate adopted by our
bank is 16.25% at present.
IMPLEMENTATION:
For every credit proposal, the actual RAROC of the past one year based on factual data and for the
next one year based on the cost of credit risk prescribed by the sanctioning authority shall be
mentioned. RAROC will form important input in credit decision by the sanctioning authority.
An Excel based RAROC computation template is placed on Bank's Intranet and can be accessed by
the link http://www.intranet.bankofbaroda.co.in BCC-Risk Management-Documents-Resources-
RAROC Template 2017-18 Revised.
In case of operative limits, commitment charges are to be levied if RAROC comes below hurdle rate
at different utilization levels. The breakeven point of utilization level may be calculated on the basis
of the template provided at intranet.
KEY TERMS
 Hurdle Rate:
Hurdle Rate is the minimum rate of return expected by the shareholders. The
acceptable RAROC for each customer (including all facilities) should be higher than or equal to
the hurdle rate decided by the bank.
The hurdle rate for our bank as computed under the CAPM model as on 31st December, 2016
stands at 16.27%. Bank has assumed hurdle rate of 16.25% for computation of our MCLR and
fix the hurdle rate at 16.25% against which RAROC of credit exposures needs to be compared.
The business verticals may compute RAROC at group level/borrower level to compare against
hurdle rate of 16.25%.
 Cash Collateral:
As per the standardized approach of Basel II, which we are following at present, the following
securities are recognized as Cash Collaterals or Financial Collaterals for credit risk.
 Bank's own deposits.
 NSCs, KVPs, LIC policies, securities issued by Central & State Governments etc.
 Debt securities rated by approved credit rating agency - with certain conditions.
 Debt securities which are issued by a bank but not rated - with certain conditions.
 Units of Mutual funds.
 Cash margin against Non-Fund based facilities.
 Gold and gold jewellery.
To take benefits of the presence of Financial Collaterals in a credit exposure, adjusted exposure
i.e. exposure net of financial collateral to a borrower is considered for computation of RWA for
capital adequacy purpose. For calculation of risk weight on an exposure the value of credit risk
mitigant (after application of haircut) is netted from the exposure amount (net of haircut) to
arrive at the net exposure on which applicable risk weight percentage is applied to find actual
risk weighted asset.
 Credit Risk Mitigant (CRM) - Guarantee:
The main types of guarantors against the credit exposure of the bank are Individuals,
Corporates, Central Govt., State Govt., ECGC, DICGCI, and CGTMSE. As per Basel II guidelines,
guarantors whose guarantee are available as Credit Risk Mitigant are Central Govt., State Govt.,
DICGCI, ECGC, CGTMSE, Banks & Primary Dealers with a lower risk weight than the borrower
and corporates rated AA(-) or better. In such cases the applicable risk weight on an exposure
would be as per the risk weight applicable to the guarantor, for the amount of exposure (net of
financial collateral) covered under such guarantee. The remaining amount of exposure would
attract a risk weight applicable to the borrower/type of exposure/ type of facility as the case
may be.
 Probability of default (PD):
The probability that the obligator or counterparty will default on its contractual obligations to
repay its debt. PD per rating grade is the average percentage of obligors that default in this
rating grade in the course of one year. The obligor rating in our internal BOBRAM shows
the default probability. The probability of default corresponding to various Obligor rating
grades is as under:
PD Estimate
BOB-1 BOB-2 BOB-3 BOB-4 BOB-5 BOB-6 BOB-7 BOB-8 BOB-9 BOB-
10
0.06 0.25 1.75 3.56 4.65 10.07 27.97 35.73 59.38 100
% % % % % % % % % %
The above table indicates that on an average the probability of a BOB-1 customer defaulting
is 0.06% on a one year horizon.
Additionally, instances of wide variance between internal rating and external rating have
been observed. In such cases, we may not be able to impute directly the PD of external
rating to our portfolio due to the dynamic transitions in external rating process against
lethargic transitions in the internal ratings. We have therefore worked on an internal rating
PD weighted Probability of Default for external rating grades (Up to investment rating grade
of BBB only. If external rating grade is below BBB, the relevant internal rating PDs have to
be used) based on our portfolio mapping.
The imputed PD of external rating based on the defaults and mapping with internal rating is
as under:
AAA AA A BBB
1.31% 2.01% 3.82% 5.24%
RAROC of a credit exposure may be computed on the basis of internal or external rating PDs
mentioned above whichever is more favourable.
 Loss Given default (LGD):

The percentage of exposure the bank might lose in case the borrower defaults. LGD=(1-
Recovery rate). Out of the defaulted accounts a certain percentage of exposure defaulted is
recovered. The remaining portion which the bank loses out of the defaulted exposure is called
the LGD. The LGD corresponding to various facility grades internally rated in BOBRAM is as
under:
FR Grade FR-1 FR-2 FR-3 FR-4 FR-5 FR-6 FR-7 FR-8

% LGD 7.50% 22.50% 37.50% 52.50% 65.00% 65.00% 65.00% 65.00%
The above table indicates that for a facility rated FR 1 the chances of recovery out of the defaulted
exposure is 92.5% and the loss is 7.50%.
 Exposure at Default (EAD):
In the event of default, how large will be the outstanding obligations if the default takes place.
EAD gives an estimate of the amount outstanding (drawn amount plus likely future drawdowns
of yet undrawn lines) in case the borrower defaults.
EAD= Exposure*CCF
 Credit conversion factor (CCF):

The credit conversion factor (CCF) converts the amount of a free credit line and other off-
balance-sheet transactions (with the exception of derivatives) to an EAD (exposure at default)
amount. This function is used to calculate the exposure at default. The CCF for different
facilities is given on page no. 49- 50, Table 8 of Master Circular on Basel Ill Capital Regulations
dated July 1, 2015.
Credi
t
S. Conv.
Instrument
N Facto
o. r
(%)
Directcreditsubstitutesi.e.generalguaranteesofindebtedness(includingstandbyLCactingas
financialguaranteeforloansandsecurities,creditenhancements,liquidityfacilitiesforsecuritiz
1.
ationtransactions)andacceptances(includingendorsementswiththecharacterofacceptance
100
)
Certaintransactionrelatedcontingentitemslikeperformancebonds,bidbonds,warranties,ind
2.
emnitiesandstandbyletterofcreditrelatedtoparticulartransaction 50
Shorttermself-liquidatingtradeletterofcreditarisingfromthemovementofgoods
3.
(DocumentaryLC)forbothissuingbankand confirmingbank. 20
Saleandrepurchaseagreementandassetsalewithrecoursewhere credit riskremainswith
thebank
4. 100
(These items are to be risk weighted according to the type of asset and not according
to the type of counterparty with whom the transaction has been entered into)
Forwardassetpurchases,forwarddepositsandpartlypaidsharesandsecuritieswhichreprese
ntcommitmentwithcertaindrawdown
5.
(These items are to be risk weighted according to the type of asset and not according 100
to the type of counterparty with whom the transaction has been entered into)
Lendingofbank’ssecuritiesorpostingofsecuritiesascollateralbybank,includinginstanceswhe
6. rethesearisesariseoutofrepostyletransactions(i.e.repo/reverserepoandsecuritieslending/s
100
ecuritiesborrowing transactions)
Note issuance facilities and revolving/ non-revolvingunderwriting
7. 50
facilities
8. Commitment withcertaindrawdown 100
Othercommitments(formalstandbyfacilitiesandcreditlines)with an originalmaturityof
9.
(i)upto1 year 20
(ii)over 1 year 50
Take-outfinance inthebooksof taking overinstitution
10. a)Unconditionaltake-outfinance 100

b) Conditionaltake-outfinance
50
 Expected Loss:
Expected loss is the average credit loss that we would expect from an exposure or a portfolio
over a given period of time.
Expected loss=EAD*PD*LGD
 Cost of Deposit and Operating Expenses:
The Funds Transfer Pricing (FTP) based cost shall be used in lieu of the Cost of Deposit
(including negative carry on CRR/SLR) and operating expenses in the RAROC Calculation. The
FTP based cost as on 07.04.2017 is 7.23%, whereas the Cost of Deposit (including negative
carry on CRR/SLR). The FTP based cost would be updated on a monthly frequency, along with
MCLR updation (7th day of the month). The appraising officer should always use the
latest available template on intranet for RAROC calculation.
Since the FTP based cost would take care of operating expenses for Fund based advances,
therefore it shall not be separately charged. However, for non-fund based advances, a flat
charge of 0.05% shall be charged as operating expenses for all non-fund based advances.
 Capital required:
For our RAROC approach, the minimum regulatory capital as per Standardized Approach of
Basel rules on credit risk will be the capital amount. The regulatory capital will include the
Capital Conservation Buffer (0.625% during 2015-16 which will increase by 0.625% to reach
2.5% as on 31.03.2019). Since Countercyclical Capital Buffer (CCCB) is an element of expected
loss, which will be calculated separately, CCCB will not be taken as capital charge for RAROC
computation. The DSIB/GSIB capital charge, even if imposed on our bank, will not form part of
capital. Hence for the year 2017-18 the capital charge will be calculated at 10.875%.
 Positive Carry on Priority Sector advances:
In order to provide a balance between need for priority sector advances and return there from,
we propose to add a positive carry on such advances in their RAROC calculation. The positive
carry rate proposed by us is 1.03% which is the difference between the investments made in
RIDF and Cost of Deposits. This component shall be reviewed once every quarter and adjusted
with. Cost of Deposit, after completion of the audit/limited review.
21. GIST OF CIRCULARS
Domain: CREDIT & RISK MANAGEMENT
POLICIES AND RECENT CHANGES IN DIFFERENT POLICIES OF Circular No.

OUR BANK ISSUED TIME TO TIME WHICH GOVERN OUR CREDIT
DECISION
1. DOMESTIC LOAN POLICY 2014 BCC:BR:106:442
i. Modification in Domestic Loan Policy 2014- The definition of Group BCC:BR:108:377
Exposure
ii. Single/Group exposure limit modification BCC : BR:108:32
iii. TEV Study BCC:BR:109:646
iv. Caps and borrower exposure limit BCC:BR:107:560
v. Clarifications in DLP 2014 BCC:BR:106:454
vi. Modification in Domestic Loan Policy 2014-Valuation report to be BCC:BR:108:382
mark & seen by BH/In-charge
vii. Modification in Domestic Loan Policy 2014 BCC:BR:108:87
viii. Modification in Domestic Loan Policy 2014 BCC:BR:107:573
ix. Policy for Financing of acquisition of equity in Overseas Companies BCC:BR:103:66
by Indian Corporate
x. Revision in Certain Benchmark parameters for credit appraisal BCC:BR:108:172
xi. Timeline for credit decisions and disposal of loan applications its BCC:BR:106:353
monitoring at various levels
xii. Time Line for SME Proposal BCC:BR:106:367
xiii. MSME – Modifications in Working Capital Assessment process for BCC:BR:109:103
Micro and Small Enterprises whose Fund Based W.C. requirements
are up to Rs.5.00 Cr
xiv. Agreement in Principle (AIP) & Activity Clearance – Revised BCC:BR:109:93
Guidelines and Format
xv. Business Development– Credit Growth BCC:BR:109:94
xvi. BCSBI Code – Most important and Common Terms & Conditions BCC:BR:108:456
xvii. Major guidelines check points at the time of enhancing the credit BCC:BR:108:517
facilities
xviii. Credit supply for large borrowers through market mechanism BCC:RMD:109:206
2. OFF BALANCE SHEET EXPOSURE POLICY 2014 BCC:BR:106:443
Modification in Policy on Off Balance Sheet Exposure (Domestic) BCC:BR:108:628
2014
3. Policy On Joint Lending Arrangement 2013 BCC: BR:105:140
5. DOMESTIC RECOVERY POLICY 2017 BCC:BR:109:284

i. Model Policy on code for collection of Dues and Repossession of BCC:BR:103:82
securities
ii. Entry of SARFAESI details in Finacle BCC:BR:110:117
iii. Resolution of stressed assets BCC:BR:110:84
iv. Incentive payment to advocates BCC:BR:109:591
v. Appeal before the tribunal BCC:BR:109:582
vi. Transfer of NPA Account to ARMB BCC:BR:109:529
vii. Policy On Sale Of Financial Assets To ARC ASC
viii. Modifications in Domestic Recovery Policy (Advances), 2017 BCC:BR:109:278
iv. Authority to Bank Executives to Participate in JLF, take appropriate BCC:BR:109:404
decisions for Resolution of Stressed Assets and for implementing
the JLF decision
6. Policy on Dishonour of Cheques and ECS mandates HO:BR:108:197
7. Policy on Sale & Purchase of Assets through Direct Assignment of
Cash Flows and Underlying Securities 2016
8. Policy Framework for Revival and Rehabilitation of Micro, Small and BCC:BR:108:306
Medium Enterprises
9. Customer Rights Policy HO:BR:107:91
10. Renewed and amended Policy on Staff Accountability BCC:BR:110:36
11. Policy on Preservation and Destruction of Records and Document HO:BR:109:35

Handling
12. Policy for Empanelment / Removal – Allocation Of Work – Fee
Structure For Advocates
13. LRM BCC:BR:110:09
14. LRM BCC:BR:109:685
POLICES AND RECENT CHANGES ISSUED BY OUR BANK WHICH IS PROPOSAL

SPECIFIC OR INDUSTRY SPECIFIC
1. REAL ESTATE POLICY BCC:BR:109:558
Real
i. Estate Advances – Finance for Housing Projects – Disclosure of BCC:BR:108:70
mortgage details
ii.
Precaution in Real Estate Finance BCC:BR:107:31
2. Bank Policy for Financing Ship Breaking Industry BCC:BR:110:42
3. External Commercial Borrowings (ECB) Policy –Bridge Finance for BCC:WB:DFB:104:99
infrastructure sector, Small Industries Development Bank of India, BCC:WB:DBF:104:123
Infrastructure Finance, Structured Obligations for infrastructure BCC:WB:DFB:104:7
sector BCC:WB:DFB:103:77
4. Policy on Flexible Structuring /Refinancing of Long Term project BCC:BR:107:349
loans (Fresh/ One Time /Existing) to Infrastructure and Core
Industries
Flexible
i. Structuring of Existing Long-Term Project Loans to BCC:BR:109:124
Infrastructure and Core Industries – Addendum
5. NBFC Financing Policy BCC:BR:109:557
POLICIES AND OTHER STATUTORY GUIDELINE ISSUED BY RBI/GOVERNMENT

1. National Policy on Electronics approved by Government of India BCC:BR:105:12
2. National Building Code 2005 BCC:BR:98:201
PRIORITY SECTOR Circular No.
1. Bank loans to MFIs for on lending – Qualifying asset – Revised loan BCC:BR:108:363
limit
2. Priority Sector Lending – Targets and Classification BCC:BR:107:353
3. Modification in priority sector guidelines BCC:BR:110:106
DOCUMENTATION
1. Periodicity of Renewal of Loan Documents BCC:BR:108:466
2. Scrutiny of NEC Title Opinion report –Compliance BCC:BR:106:408
3. Declarations cum Undertakings cum Authority BCC:BR:107:16
4. Non Resident Indians – Execution of Loan Documents through POA BCC:BR:103:171
5. Operations through Power of Attorney” – Master Circular HO:BR:97:98
6. Revised LDOC-7 Letter of Continuing Security BCC:BR:109:498
CERSAI
1.
1. CERSAI Fee Accounting Procedure BCC:BR:110:115
2. CERSAI- Need for Registration/ Satisfaction of Charge online BCC:BR:109:505
through CERSAI Portal only- Revised procedure w.e.f. 01.10.2017
3. CERSAI – Updated Guidelines BCC:BR:109:143
4. CERSAI- Need for Registration/ Satisfaction of Charge online BCC:BR:109:505
through CERSAI Portal only- Revised procedure w.e.f. 01.10.2017
5. Central Registry – Field Restriction on Survey Number, Plot Number BCC:BR:107:125
and House Number on CERSAI Portal
6. Preventive Vigilance: CERSAI – Filing/Satisfaction of Security BCC:BR:108:301
Interest Transactions secured by Movables and Intangibles
7. CERSAI in Consortium Accounts BCC:BR:106:409
DISCRETIONARY LENDING POWERS (DLP)

1. Revision of Discretionary Lending Powers (DLP) – JMG/S I to BCC:BR:102:357
Deputy General Manager in Scale SMG/S VI
2. Discretionary Lending Powers (DLP) – JMG-S/I to TEG-S/VI – BCC: BR:103: 90
Clarifications
3. Deviation modification BCC:BR:110:75
4. Discretionary Lending Powers with regard to Discounting / BCC: BR : 102: 13
Purchasing of Bills under Prime Bank’s LCs (Specific Additional
Powers)
5. De linking Retail Agriculture Loans from Per Party/ Group DLP BCC:BR:106:192
6. Revision in (i) Certain Benchmark Financial parameters for credit BCC:BR:108:172
appraisal and
(ii) Discretionary power of modification/ deviation/ concession in
rate of interest/ processing charges etc.
7. (j) Change in name of the Credit Committee at Corporate Office BCC:BR:107:186
headed by CMD from COCC-CMD to COCC-MD&CEO
ii) Revision in existing delegated powers for considering
modification
8. Discretionary Lending Powers – Retail Lending BCC:BR:95:333
9. Revision in Powers for Concession / Deviation in various Financial/ BCC:BR:108:587
Non- financial parameters of Retail Loan products
10. (i) Revision in Caps on Domestic Credit and Investment Exposure to BCC:BR:109:490
Industries/Sectors for Financial Year 2017- 18 (ii) Single / Group
Borrower Exposure Limit
11. (k) Opening of Fixed Deposit Accounts BCC:BR:106:320
ii) Sanction and disbursement Loan against Bank’s own deposit
12. Concession in rate of interest / service charges BCC:BR:108:404
13. Modification of certain conditions in Bank’s guidelines for granting BCC: BR: 105:199
TOD in current accounts
14. Granting of Temporary Overdrafts (TODs) by branches BCC:BR:98:272
15. Change in name of Committee and Powers of Committee BCC:BR:107:186
16. Functioning of Credit Committees at Regional, Zonal and Corporate BCC:BR:104:271
Modifications
17. Setting up of credit Committees at Regional, Zonal and Corporate BCC:BR:104:178
Office Levels
18. Revision in guidelines for Release of existing security I Guarantee in BCC:BR:97:315
advance accounts
19. Advances to Partnership Accounts where HUF is a partner BCC:BR:98:203
20. TOD/Excess BCC:BR:102:228
AIP & ACTIVITY CLEARANCE

1. Activity Clearance – Clarifications BCC:BR:109:130
2. Agreement in Principle (AIP) & Activity Clearance – Revised BCC:BR:109:93
Guidelines and Format
3. Modification in Activity clearance BCC:BR:109:342
4. New Originations –Priorities and Approval BCC:BR:108:103
5. Introduction of Activity Clearance in Gems & Jewellery Sector BCC:BR:107:171
6. New Business proposals – Agreement-In-Principle- Due Diligence BCC:BR:104:310
Information
CREDIT RATING
1. New CRISIL Credit Rating Models for Commercial Advance BCC:BR:99:41
2. Credit Rating BCC:BR:109:314
3. Internal Credit Rating of MSME Advances A/cs –Revision in cut-off BCC:BR:105:410
limit for using the existing New Scoring card type of Model for use
of rating the MSME accounts with exposure of Rs 2 Lacs to Rs
2crores
4. Retail Loans: CRISIL Rating Models BCC:BR:101:311
5. Modifications in BOBRAM Model for credit rating of Retail Loan BCC:BR:102:201
6. Common Mistakes committed during Rating of Commercial Advance BCC:RMD:BR:107:04
Accounts Rated under New (CRISIL) Models
7. Upgradation of Four existing BOBRAM Rating Models (Large BCC:BR:109:209
Corporate, SME Manufacturing, SME Services & Traders Model)
8. Change in composite Rating Matrix in BOBRAM w.e.f 16 July,2016 BCC:BR:108:329
9. Process of Half yearly Rating under NEW CRISIL RATING MODELS BCC:BR:100:327
10. Submission of Important Documents to Carry out Validation BCC:BR:107:238
11. Rating of account under BOBRAM BCC:BR:102:198
12. New CRISIL Rating Models For Commercial Advance BCC:BR:98:269
13. Capturing the Risk of Un-hedged Foreign Currency Exposure (UFCE) BCC:BR:107:406
14. Major Changes in credit rating workflow in BOBRAM application BCC:BR:105:11
15. Mapping of CBS Customer IDs and Facility IDs with BOBRAM IDs for BCC:BR:RMD:109:191
NPA accounts
16. Private Credit Rating for Corporate Credit Appraisals BCC:BR:108:499
17. Probability of Default (PD) of ‘Bank’ and ‘NBFC’ exposures BCC:BR:108:242
18. SME manufacturing model calibration under BOBRAM BCC:BR:107:405
19. Revised Eligibility Criteria for use of SME (services) Model for Rating BCC:BR:101:142
of identified service sector units under BOBRAM Methodology
20. Introduction of new BOBRAM Rating Model for Real Estate BCC:BR:109:208
21. Revised Eligibility Criteria for selection of SME and LCM models for BCC:BR:100:217
Rating under CRISIL RAM
22. Revision of Rating Symbols and Definitions of Credit Rating BCC:BR:103:314
Agencies
23. Authority to CMD/ED/Zonal Head for waiver of external credit rating BCC:BR:104:432
in MSME accounts above Rs.5.00 Crores
24. External Rating of Large Borrowal Accounts BCC:BR:100:152
25. Memorandum of Understanding with CRISIL Ltd. For Rating of MSE BCC:BR:107:509
Units under “NSIC-CRISIL performance and Credit Rating Scheme
for Micro and Small Enterprise(MSE)” and normal MSME Ratings
26. External Credit Rating of credit exposures BCC:BR:108:429
27. Baroda Traders Loan- Clarification for External Rating BCC:BR:107:601
28. Extension of Memorandum of Understanding with Brickwork Ratings BCC:BR:106:299
India P Ltd (Brickwork) for rating of SME units under “NSIC
Brickwork performance and Credit Rating Scheme
29. Re rating BCC:BR:109:571
RAROC & UNDRWAN COMMITMENTS

1. Master Circular –Implementation of Risk Adjusted Return on Capital BCC:BR:109:171
(RAROC) framework for credit exposures
2. Probability of Default (PD) of ‘Bank’ and ‘NBFC’ exposures for BCC:BR:108:242
calculation of RAROC
3. Capital Conservation – Undrawn Commitments BCC:BR:108:114
4. Observations of On-Site Compliance Test Check Report done by BCC:BR:109:195
Compliance Dept for the quarter ended 31st Dec 2016
5. Undertaking for cancellation of undrawn portion commitment BCC:BR:108:203
6. Undertaking for cancellation of undrawn portion commitment. BCC:BR:108:617
7. Undrawn Commitments-Undrawn Working RAROC Template BCC:BR:108:409
TAKEOVER
1. Takeover of “Borrowal Accounts” from other Banks – Adherence to BCC:BR: 106:441
laid down guidelines
2. Takeover of Borrowal accounts from other banks – Discrepancies BCC:BR:103:159
observed by Industrial Law Department of our HRM
3. Prevention of Fraud in “TAKE OVER” Accounts BCC:BR:107:498
4. Take over Loans and Financing of Infrastructure Projects BCC:BR:103:281
5. Takeover of Borrowal accounts from other banks- CREDIT REPORT BCC:BR:104:305
6. Takeover of “Borrowal Accounts” from other banks BCC:BR:105:547
7. Takeover of Borrowal accounts from other banks BCC:BR:103:132
8. New Menu for Taken Over Account, corporate loan BCC:BR:108:303
CONSORTIUM & MULTIPLE BANKING

1. Bank Finance under both Consortium Arrangement and Multiple BCC:BR:103:172
Banking Arrangement
2. Compliance of various statutory requirements in consortium BCC:BR:108:603

advances
3. Consortium & Multiple Bank Financing – Due Diligence & Sharing Of BCC:BR:103:299
Information
4. Frauds in borrowal accounts having multiple banking arrangements BCC:BR:101:225
5. Guidelines on Lending under Consortium Lending and Multiple BCC:BR:100:289
Banking
6. Policy on Joint Lending Arrangements- Adoption and BCC:BR:105:140
implementation
7. Guidelines on Lending under Consortium Lending and Multiple BCC:BR:100:289
Banking Arrangement
8. Lending under Consortium Arrangement Multiple Banking BCC:BR:101:74
Arrangements
9. Lending under Multiple Banking BCC:BR:101:235
10. Sharing of Information – Consortium & Multiple Bank BCC:BR:104:462
NBFC
1. NBFC Financing Policy BCC:BR:109:557
REAL ESTATE SECTOR

1. Real Estate Policy BCC:BR:109:558
INFRASTRUCTURE SECTOR
1. Financing of Infrastructure – Definition of ‘Infrastructure Lending BCC:BR:105:525
2. Flexible Structuring of Existing Long Term Project Loans to BCC:BR:109:124
Infrastructure and Core Industries – Addendum
3. Prudential Norms on Advances to Infrastructure Sector- BCC:BR:105:133
Classification of PPP Projects as secured advances
4. Prudential Norms on Asset Classification Pertaining to Advances- BCC:BR:100:134
Infrastructure Projects under Implementation and Involving Time
Overrun
5. Flexible Structuring of Long – Term Project Loans to Infrastructure BCC:BR:106:350
and Core Industries
6. Policy on Flexible Structuring Refinancing of Long Term project BCC:BR:107:349
loans (Fresh One Time Existing) to Infrastructure and Core
Industries
MSME
1. Master Circular – Lending to Micro, Small & Medium Enterprises BCC:BR:109:452
(MSME) Sector
2. MSME Campaign- clarification BCC:BR:110:69
3. MSME Campaign BCC:BR:110:57
4. SRTO BCC:BR:110:60
5. Baroda Contractor Scheme BCC:BR:110:54
6. BOB GST Receivable Card BCC:BR:110:49
7. Contact Point Verification BCC:BR:109:639
8. Contact Point Verification BCC:BR:109:618
9. TreDS BCC:BR:109:602
10. TreDS BCC:BR:109:547
11. Growth in MSME Sector BCC:BR:108:351
12. MSME Products – Updated Product Details along with powers for BCC:BR:109:119
considering deviations
13. MSME Products – Clarification BCC:BR:109:169
14. New Scheme – NULM “Baroda Self Employment programme for BCC:BR:107:249
Individuals and Group Enterprises/SHGs” (Restructured SJSRY
scheme)
15. Finance in Textile Sector BCC:BR:109:375
16. Technology and Quality up-gradation support to MSME-TEQUP BCC:BR:107:345
Scheme
17. MOU between Bank of Baroda and M/s CSC e-Governance Services BCC:BR:108:1700
India Ltd.
18. Lending to MSME Sector Purpose of Advance Code BCC:BR:105:93
19. MSME – Modifications in Working Capital Assessment process for BCC:BR:109:103
Micro and Small Enterprises
20. Launching of New Product under MSME: - Baroda E- Business Pack BCC:BR:109:346
21. Pan India Scheme for Financing Textile Units – Renewal BCC:BR:109:375
22. Tie-up with Amazon BCC:BR:109:425
23. “SME Protect” policy by Tata AIG General Insurance Co Ltd – Small BCC:BR:109:441
and Medium Enterprises
24. Supply Chain Finance (SCF) BCC:BR:109:495
25. Supply Chain Finance BCC:BR:109:372
26. MOU with various manufacturing companies BCC:BR:109:341
27. GST Relief BCC:BR:110:78
CREDIT GUARANTEE SCHEME FOR MICRO AND SMALL ENTERPRISES

1. MASTER CIRCULAR– Credit Guarantee Scheme For Micro And Small BCC:BR:106:394
Enterprises
2. CGTMSE – Clarifications on Marking of NPA and Lodgement of BCC:BR:108:56
Claims
3. CGTMSE– 1 Enhancement in Guarantee cover and Interest Cap 2. BCC:BR:109:77
Opening of accounts under relevant GL Codes
4. Classification of Sector/Activity in CGTMSE Portal BCC:BR:107:33
5. CGTMSE – Maintenance of GL CGTMSE Claim Received a/c BCC:BR:106:195
6. CGTMSE-Observations in the area of appraisal and due diligence BCC:BR:109:127
1. Young entrepreneurs under the Credit Guarantee Scheme BCC:BR:106:366

2. Continuation of Credit Linked Capital Subsidy Scheme (CLCSS) BCC:BR:109:133
beyond financial year 2016-17
3. Information of Micro, Small and Medium Enterprises under CLCSS BCC:BR:108:423
Scheme
4. Credit Linked Capital Subsidy Scheme (CLCSS): Common BCC:BR:106:28
deficiencies
5. Sixth Supplement on Revised Guidelines on Credit Linked Capital BCC:BR:106:82
Subsidy Scheme (CLCSS)
6. Summary of Credit Linked Capital Subsidy Scheme (CLCSS) BCC:BR:106:200
guidelines
7. Energy Efficient Technology Projects – Scheme of Ministry of MSME BCC:BR:106:453
“Technology and Quality Up gradation support to MSME” (TEQUP)
8. Technology and Quality up-gradation support to MSME-TEQUP BCC:BR:107:345
Scheme
PMEGP
1. Prime Minister’s Employment Generation programme (PMEGP) – BCC:BR:108:540
Updated Scheme Guidelines
2. Financing under PMEGP – Action points to be observed in BCC:BR:107:227
implementation
3. PMEGP-Pending Applications / Reconciliation of Margin Money BCC:BR:105:551
Adjustment accounts
4. Withdrawal of exemption of completion of EDP training within a BCC:BR:106:115
period of 12 months from the date of release of first instalment
under PMEGP Scheme
5. CORRIGENDUM –Circular No BCC/BR/106/115 dated 22032014 BCC:BR:106:142
Withdrawal of exemption of completion of EDP training within a
period of 12 months from the date of release of first instalment
under PMEGP Scheme
6. Items banned by Govt. of India to automatically come under BCC:BR:105:395
negative list of PMEGP scheme
7. Policy clarification on certain issues raised by field offices relating to BCC:BR:106:245
PMEGP Scheme by KVIC
8. Financing under Prime Minister’s Employment Generation BCC:BR:106:219
Programme (PMEGP)
9. Financing under PMEGP – Review of the Scheme and its BCC: BR: 105:223
implementation
10. PMEGP – Obtaining of password for operation on in scheme BCC:BR:108:458
procedures online portal
11. PMEGP – Relaxation in the condition of EDP Training for BCC:BR:109:105
disbursement of loan in respect of sanctions done up to 31.03.2017
12. Financing under Prime Minister’s Employment Generation BCC:BR:108:175
Programme (PMEGP) Operational guidelines.
13. Prime Minister’s Employment Generation Programme (PMEGP) – BCC:BR:108:440
operation of online portal
PMMY
1. New Scheme – Pradhan Mantri MUDRA Yojana – PMMY BCC:BR:107:239
2. Pradhan Mantri Mudra Yojana (PMMY)- Simplified Loan application BCC:BR:107:338
and proposal Formats and other relaxations
3. Pradhan Mantri Mudra Yojana (PMMY) – Common loan application BCC:BR:107:383
formats as approved by IBA
4. Pradhan Mantri Mudra Yojana (PMMY) – Mudra loans – Action BCC:BR:107:449
Points
5. PMMY – Pradhan Mantri MUDRA Yojana – Scheme Codes BCC:BR:107:298
6. Checklist for Shishu, Kishore and Tarun under Pradhan Mantri BCC:BR:107:647
MUDRA Yojana
7. Launching of Baroda MUDRA Card BCC:BR:108:7
8. PMMY (Pradhan Mantri Mudra Yojana) loans- Pre-& Post BCC:BR:108:509
disbursement follow up
9. Coverage of “Allied Activities to Agriculture” under Pradhan Mantri BCC:BR:108:469
Mudra Yojana (PMMY)
10. Opening of advance accounts “Allied Activities to Agriculture” under BCC:BR:108:490
PMMY
11. Observation by RBI officials oh compliance of guidelines in Loans BCC:MSME:109:577
sanctioned under Pradhan Mantri Mudra Yojana
12. Pradhan Mantri MUDRA Yojana (PMMY) – BOB Weaver Mudra BCC:BR:108:468
scheme
13. PMMY Do’s and Don’ts against loan applications BCC:BR:108:627
14. PMMY Loans- complaints by applicants BCC:BR:108:552
15. Clarifications in respect of Pradhan Mantri Mudra Yojana loans- BCC:BR:109:345
NCGTC Guarantee Coverage available
16. Credit Guarantee BCC:BR:108:553
17. MOU with Glocal Healthcare BCC:BR:109:540
18. Rate of interest BCC:BR:109:59
19. Monitoring of Mudra Accounts BCC:BR:109:652
STAND-UP INDIA
1. Stand up India Scheme BCC:BR:108:160
2. Hon’ble Prime Minister’s address to the Nation on Independence BCC:BR:107:478
Day regarding Start-up India Programme
3. Stand Up India Scheme- BCC:BR:108:240
(l) Scheme Codes and
(ii) Common Application Format
NON-FUND BASED FACILITIES

1. Bank Guarantees issued in favour of President of India BCC:BR:110:02
BCC:BR:109:13
BCC:BR:108:259
2. Discontinuation of LOU and LOC BCC:CIC:DBF:110:06
3. Sanctioning and Monitoring of LC and BG facilities- Additional BC: BR:105:114
practices
4. Modification in features of Bid-Bond Guarantee BCC:BR:105:499
5. Quoting of File no. Reference No. in correspondence while sending BCC:BR:109:196
confirmation having issued Bank Guarantee
6. Use of Structured Financial Messaging System (SFMS) for sending BCC:BR:107:244
and receiving Bank Guarantee
7. Use of SFMS (Structured Financial Messaging System) for Letter 0f BCC:BR:107:375
Credit (LC) and Bank Guarantee (BG)
8. Using of SFMS in LC & BG BCC:BR:108:467
9. Issuance of Bank Guarantee BCC:BR:109:263
10. Government Banking- Issue of Letters of Credit and Bank BCC:CB:DFB:109:40
Guarantee
11. Commission on Bank Guarantee BCC:BR:109:600
ROI & CHARGES

1. Modification in Service Charges Advance SME BCC:BR:107:314
2. Revision in Service Charge Advance SME BCC:BR:107:132
3. Credit Related Service Charges HO:BR:104:231
4. Unified Processing Charges for Women SHGs BCC:BR:107:379
5. Clarification on applicability of service tax on Mortgage Creation HO:BR:107:43
Charges
6. MCLR Framework BCC:BR:108:133
7. Implementation of MCLR BCC:BR:108:154
8. Implementation of MCLR BCC:BR:108:166
9. MSME – Introduction of MCLR – Clarification BCC:BR:108:260
10. Retail loan – introduction of MCLR – Clarifications BCC:BR:108:348
11. Applicability of Strategic Premium in Rate of Interest on Advances – BCC:BR:108:598
Clarification
12. Interest Rate of Advances BCC:BR:109:64
13. Shifting of loans from Base Rate BPLR system to MCLR – BCC:BR:109:142
Clarifications
14. Tenor based MCLR – Clarifications BCC:BR:109:29
15. MSME Regulatory Segment – Introduction of MCLR BCC:BR:108:209
16. Clarification on interest rate to be charged on PMMY loans BCC:BR:109:59
17. Implementation of Credit spreads on MCLR and Base Rate linked BCC:BR:109:369
Advances
18. Penal/ Additional Interest on default of Re-Payment of Loan BCC:BR:109:389
19. Interest Rate on Gold Card Holders under Export Credit BCC:BR:109:485
20. Interest rate on MSME Non regulatory Advances BCC:BR:109:504
CREDIT REPORTS, CIBIL

1. Understanding of CIBIL Report BCC:BR:108:277
2. CIBIL’s Commercial Report & Charge BCC:BR:99:357
3. Consumer Credit Information Report & Charge BCC:BR:98:134
4. Implementation of Damodar Committee Recommendation on BCC:BR:104:238
Customer Service – Reporting of borrowers’ information to Credit
Information Bureaus (CIB)
5. Issuance of NEW CIBIL Login Id BCC:BR:104:412
6. Mandatory checking of CIBIL TransUnion Score BCC:BR:109:12
7. Submission of Credit Information data to CIBIL and submission of BCC:BR:105:488
other information’s on defaulters to RBI CIBIL
8. Credit report BCC:CB:DBF:109:25
9. CRIF BCC:BR:108:439
COMPANY’S ACCOUNT
1. Disbursement of Credit Facilities to Corporate Borrowers – BCC:BR:103:345
Filing of Charge with ROC – Pre-disbursement condition
2. Clarifications on issuance of corporate guarantee under Companies BCC:BR:106:284
Act, 2013. (Clarification in issuance of corporate guarantee under
Companies Act Sec 185 & 186)
3. Notification regarding implementation of certain provisions of BCC:BR:105:514
Companies Act, 2013, Implementation of Sub-section 180(1) (a)
(c) of Companies Act, 2013- Borrowing Power
4. Notification of Certain provisions of Companies Act, 2013 and BCC:BR:106:166
clarification Sec 185 & 186
5. Notification of certain provisions of companies Act, 2013 BCC:LEGAL:NK:106:114
6. Obtaining certificate of commencement of business at the time of HO:BR:108:210
opening account
7. Master Circular – Supply Chain Finance product BCC:BR:109:372
8. Rollout of Corporate Banking Transformation (CBT) and Release of BCC:BR:109:416
Process Manual for implementation of Corporate Relationship
Model
9. Bank of Baroda joins Bankchain Consortium BCC:BR:109:433
MORTGAGE OF PROPERTY
1. Safeguards for obtaining Residential Flat as Collateral security for BCC:BR:103:254
SME loans
2. Tenanted Property-Precautions to be taken while accepting BCC:BR:106:406
tenanted property as security
3. Valuation of Immovable properties charged to our bank BCC:BR:109:148
OTHER SCHEMES
1. New Credit Product “Corporate Loan” Facility BCC:BR:105:195
2. Loans & Advances against shares debentures to Individuals BCC:BR:99:79
3. Advance Against Shares- Revised Guidelines BCC:BR:99:218
4. BOB Soft Loan Scheme to Sugar Mills 2014-15 BCC:BR:107:347
5. Production Subsidy to Sugar Mills BCC:BR:108:556
6. Renewal of the existing “Food & Agro Based Scheme” along with BCC:BR:109:483
modifications
APPRAISAL & OTHER CIRCULAR

1. FDI in India –definition of group company BCC:LCB:DFB:105:110
2. Concession BCC:BR:109:158
3. Credit growth BCC:C&I:109:94
4. Change in validity period of sanction from -4- months to -3- months BCC:BR:109:159
5. Modification in sanction / Review Conveying Letter format Clause on BCC:BR:106:58
e-Products in Credit sanction letter
6. TEV Study guidelines-MASTER CIRCULAR BCC:BR:105:249
7. TEV Study OR Vetting for financing projects BCC:BR:99:109
8. Revision in Certain Benchmark parameters for credit appraisal BCC:BR:108:172
9. Advance Proposal submission of data related to compliances BCC:BR:105:46
10. Check List for Credit Proposals BCC:BR:107:513
11. Legal Compliance Certificate HO:BR:105:188
12. Irregularities cited in Credit Audit Reports to be included in credit BCC:BR:99:91
proposal
13. Business Development – Credit Growth BCC:BR:109:94
14. Concession in Rate of Interest/Service Charge BCC:BR:109:158
15. Computation of Yield on Advances BCC:BR:98:238
16. Considering proposals where Credit Card account was written-off BCC:BR:108:452
settled by our Bank Other Bank in the Past
17. Discount Rate for Computing Present Value of Future Cash Flows BCC:BR:107:328
18. Discrepancies in Tax ROC Returns Submission of Review proposals BCC:BR:105:328
19. End use of Funds – Monitoring BCC:BR:105:325
20. Maintenance of Current accounts with Other Banks by our BCC:BR:106:123
Borrowers
21. Major guidelines check points at the time of enhancing the credit BCC:BR:108:517
facilities”.
22. MCB Format-Consortium & Multiple Bank Financing – Due Diligence BCC:BR:103:299
& Sharing of Information
23. Statutory Dues to Auditor BCC:BR:104:140
24. Disbursement of credit facilities – Oral / Verbal Sanction BCC:BR:106:402
25. Industry reports – CRISIL Research BCC:BR:106:83
26. Practice of engaging arrangers in availing of loans from Public BCC:BR:104:128
Sector Banks
27. Parking of limits sub-limits at other branches BCC:BR:95:184
28. Sector-wise classification of Corporate Advance Accounts in BCC:BR:109:78

CBS/Finacle
29. Outbound tele-calling for Pre-Approved limits and collections of BCC:BR:109:279
overdue amount in PNPA accounts- Expected response from
Branches
30. Control & Reporting Structure of 1) CFS Branches 2) Mid-Corporate BCC:BR:109:267
Branches (Emerging Corporate Branches)
31. Monitoring End Use Of Funds BCC:BR:109:241
32. Revision of service charges w.e.f. 08.05.2017 HO:BR:109:78
33. Validity Period of Sanction BCC:BR:109:450
34. Stock Audit BCC:BR:107:639
35. Stock Audit BCC:BR:109:637
36. CREMON BCC:BR:110:119
RETAIL LOANS
1. Master Circular on Baroda Auto Loan BCC:BR:109:444
2. Modification in margin norms in Baroda Auto Loan BCC:BR:109:516
3. Waiver of prepayment charges to individuals BCC:BR:109:513
4. Launching of special campaign to take over Baroda Mortgage BCC:BR:110:94
loan/Loan against Property
5. Credit reports in LAPS BCC:BR:110:89
6. Special Campaign for take over of quality home loans BCC:BR:110:95
7. Revision in mortgage creation charges in BTL & BML BCC:BR:110:74
8. Retail loans – satisfaction about business data of non salaried BCC:BR:110:77
9. Various insurance products with retail loans BCC:BR:110:48
10. Tie up with Frankfinn Aviation Services (P) Ltd. BCC:BR:110:35
11. Conveyance Loan for staff BCC:BR:110:04
12. Lead generation BCC:BR:109:660
13. DSA for education loan and mortgage loans BCC:BR:109:607
14. Chola Group Credit linked Cancer Care Insurance BCC:BR:109:573
15. Reduction in applicable risk spread in BTL and BML BCC:BR:109:556
16. P-LAP BCC:BR:109:524
17. P-LAP BCC:BR:109:322
18. Group credit secure policy by TATA AIG General Insurance company BCC:BR:109:205
19. Health Insurance Policy for retail borrowers by MAX BUPA BCC:BR:109:140
20. Takeover of retail loans- clarifications- TCR based on original title BCC:BR:109:115
deeds
21. Group credit life insurance for retail loan borrower BCC:BR:108:30
22. Modification on guidelines on rate of interest having CIBIL -1/O BCC:BR:108:588
23. Deviation norms BCC:BR:108:587
24. Revision in Uniform Processing charges BCC:BR:108:274
25. Credit report BCC:BR:107:628
26. NEC Report BCC:BR:107:546
27. Verification of vehicle through VAAHAN BCC:BR:107:503
28. Baroda Vehicle Loan for young Officers BCC:BR:108:472
29. Restructure and asset classification of education loan BCC:BR:110:91
30. Modification in education loan schemes BCC:BR:110:80
31. Reduction in rate of interest for education loans of selected premier BCC:BR:110:20
institutions of India
32. Extending education loans for executive development programmes BCC:BR:109:686
under Baroda Scholar
33. Sanction of education loan at branches in vicinity of the institute BCC:BR:109:640
34. Date of birth mandatory for education loan interest subsidy claim BCC:BR:109:470
35. Extending education loan for executive development programmes BCC:BR:109:392
offered by premier institutions in India
36. Online education loan schemes BCC:BR:108:286
37. Vidyalakshmi Portal BCC:BR:108:04
38. Master Circular on Baroda Education Loan BCC_BR_108_612
39. Merging Baroda Career Development Loan Scheme (Education BCC_BR_108_622
Loan) with other regular Education Loan Schemes
40. Modification in certain parameters of Baroda Education Loans to BCC_BR_109_155
Students of Premier Institutions for e-PGP programme being offered
by IIM, Ahmedabad through e-Mode
41. Baroda Education Loans to Students of Premier Institutions for e- BCC_BR_109_ 218
PGP programme being offered by IIM, Ahmedabad through e-Mode
42. Dr. Ambedkar Central Sector Scheme of Interest Subsidy Scheme BCC_BR_109_274
43. Empanelment of Digital DSAs for sourcing of mortgage backed BCC_BR_109_126
Education Loan applications for Overseas Studies
44. Revised List B of Institutions for Education Loan (Baroda Scholar) BCC_BR_109_ 217
45. Sanction of AAA loan BCC:BR:110:68
46. Baroda Special Home loan scheme 2008 BCC:BR:110:51
47. Baroda Home loan Group Personal Accident Insurance Policy BCC:BR:110:52
48. Baroda Home loan to NRI/PIO/OCI- clarification BCC:BR:110:15
49. Audited Balance sheet for computing depreciation Income BCC:BR:110:18
clarification
50. CLSS BCC:BR:110:22
51. Special Festival Offer under 100 % waiver of processing charges BCC:BR:110:02
52. Tie up with Switch Me BCC:BR:109:426
53. Classification BCC:BR:109:406
54. Free BOB Credit card to Home loan borrowers BCC:BR:109:364
55. Special Campaign for takeover quality home loan ac BCC:BR:109:334
58. Takeover of home loans – Clarifications BCC:BR:109:63
59. Special Campaign BCC:BR:109:50
60. Property Insurance BCC:BR:108:566
61. TATA AIG Insurance BCC:BR:108:559
62. Empanelment of DSA – Home loans BCC:BR:108:207
63. 1.0 Master Circular on ‘Baroda Home Loan BCC_BR_108_430
64. 1.1 Reduction of Rate of Interest on Home Loans by waiver of BCC_BR_108_544
Strategic Premium.
65. Credit Guarantee for selected housing loan pool from India BCC_BR_109_163
Mortgage Guarantee Corporation Pvt. Ltd
66. Home Loans – Conversion from Base Rate to MCLR – Clarifications BCC_BR_109_60
67. Implementation of Pradhan Mantri Awas Yojana (PMAY) – Credit BCC_BR_109_211
Linked Subsidy Scheme (CLSS) for Middle Income Group (MIG)
68. Modification in Rate of Interest for Home Loans to applicants having BCC_BR_109_27
CIBIL score of (-1) or 0 w.e.f. 11.01.2017.
69. Baroda Mortgage Loan – Master Circular BCC_BR_109_447
70. Baroda Loan to Pensioners BCC_BR_107_158
71. Baroda Personal Loan – Revised Product Profile BCC_BR_108_561
72. Baroda Personal Loan – Modifications for Employees of Central BCC_BR_109_182
State Govt, Autonomous Bodies, Public Joint Sector Undertakings &
Educational Institutions
73. Master Circular – Baroda Traders Loan BCC_BR_109_446
74. Stock Audit in Borrowal Accounts- Clarification for Baroda Traders BCC_BR_108_162
Loan
75. Master Circular on Other Retail Loans BCC_BR_107_455
76. Pre-Approved Top Loan facility for Our Existing Baroda Home Loan BCC_BR_109_283
Borrowers- Clarification to keep the Loan documents along with
Primary Home Loan documents
77. Sanction of fresh Pre-Approved Credit Limit (PAL) of Home Loan, BCC_BR_109_210
Car loan & Personal Loan) for Liability Customers
78. Validity period of ‘Pre-Approved Credit Limit(PAL) BCC_BR_109_168
79. Recovery of Processing charges in ‘Pre-Approved Credit Limit BCC_BR_109_147
80. Monitoring and follow up of leads generated by Outbound tele BCC_BR_109_128
callers for Pre-Approved Limits
81. Pre-Approved Top Up Loan Facility for Our Existing Baroda Home BCC_BR_109_65
Loan Borrowers Detail of eligible borrowers & pre-approved limits
82. Launching of New scheme – ‘Pre-Approved Top Up Loan Facility for BCC_BR_109_53
our Existing Baroda Home Loan Borrowers’
83. Pre-Approved Credit Limits – Launch BCC_BR_108_639
84. Pre-Approved Credit Limit (Home Loan, Car loan & Personal Loan BCC_BR_108_582
85. Pre-Approved Credit Limits to Liability Customers BCC_BR_108_280
86. Commitment Charges on Lower utilization of working capital (BTL) / BCC:BR:109:262
overdraft limits (BML)
87. Retail Loan applications- Conveying acknowledgement/Rejection/ BCC:BR:109:357
Scheme Specific Most Important Terms and Conditions (MITC) to
the applicant.
88. Empanelment of Contact Point Verification (CPV) Agencies for Retail BCC:BR:109:366
Loans
89. Tracking Checklist for Education Loans BCC:BR:109:393
90. Opening of Loan Accounts in Finacle under Pre Approved Schemes BCC:BR:109:408
91. Clarifications on Commitment Charges on Lower Utilization of BCC:BR:109:468
Working Capital (BTL)/ Overdraft Limits (BML)
92. Commitment charges in Baroda Traders Loan/Baroda Mortgage BCC:BR:109:262
Laon
93. Credit card BCC:BR:108:438
94. Credit card BCC:BR:108:452
95. CIBIL BCC:BR:108:482
96. CIBIL Score BCC:BR:109:472
97. Outbound telecaller BCC:BR:109:443
98. MCLR BCC:BR:109:220
99. MCLR BCC:BR:109:215
100. MCLR BCC:BR:109:532
101. Credit reports BCC:BR:107:548
102. Review with Increase in Baroda Traders Loan BCC:BR:110:113
103. Tie up with India First BCC:BR:110:118
BCSBI
1. BCSBI Code - Most important and Common Terms & Conditions BCC:BR:108:456
2. Non-Compliance of KYC-AML guidelines and other parameters of BCC:BR:109:139
Regulatory Compliance
3. Introduction of Online Loan Application Tracking System BCC:BR:107:136
4. Retail Loans- Implementation of Code of Bank’s Commitment to BCC:BR:107:38
Customers and Micro & Small Enterprises by BCSBI
5. Timeline for credit decisions and disposal of loan applications its BCC:BR:106:353
monitoring at various levels
6. Credit Facilities to Minority Communities – Modification BCC:BR:108:493
7. Credit Facility to SC & ST BCC:BR:108:450
8. BCSBI- Code Compliance Rating - Action Points - MSME Borrowers BCC:BR:109:253

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HANDBOOK ON CREDIT

3 PRE-SANCTION APPRAISAL(CREDIT APPRAISAL) 25

4 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS 36

Baroda Academy 1 Inventing Methods for Igniting Minds updated as on 15.03.2018

To ensure the safety of lending, following factors may be considered:

5 ‘C’s of the borrower = Character, Capacity, Capital, Collateral, Conditions

Character of a borrower is constituted by honesty, sobriety, good habits, personality, the

Baroda Academy 2 Inventing Methods for Igniting Minds updated as on 15.03.2018

Baroda Academy 3 Inventing Methods for Igniting Minds updated as on 15.03.2018

Baroda Academy 4 Inventing Methods for Igniting Minds updated as on 15.03.2018

Baroda Academy 5 Inventing Methods for Igniting Minds updated as on 15.03.2018

Sources of information available to assess the borrower

Baroda Academy 6 Inventing Methods for Igniting Minds updated as on 15.03.2018

1. Which of the following is not a part of 5 C’s?

2. Principle of Risk spread means:

a) Keeping all the eggs in one basket

b) Keeping all the eggs with preservatives

c) Keeping all the eggs in Refrigerator

d) Not to keep all the eggs in one basket

e) Not to buy eggs

Baroda Academy 7 Inventing Methods for Igniting Minds updated as on 15.03.2018

e) All of the above

Baroda Academy 8 Inventing Methods for Igniting Minds updated as on 15.03.2018

1 Principle of safety of This factor now assumes great importance

2 Principle of profitability Profit is the result of sound business decision

3 Principle of liquidity The deposits are payable on demand or at

4 Principle of purpose Lending should be for an approved purpose

5 Principle of risk spread Bank should not concentrate advances to

6 Principle of security Security gives leverage to the lender in case

7 Character Character implies honesty, integrity, and

8 Capacity Capacity means knowledge of the borrower

9 Capital Capital is the funds to be employed by the

10 Collateral Collateral may be required in certain cases

Baroda Academy 9 Inventing Methods for Igniting Minds updated as on 15.03.2018

Baroda Academy 10 Inventing Methods for Igniting Minds updated as on 15.03.2018

BLIND PERSONS AND HANDICAPPED PERSONS

2. SOLE PROPRIETORSHIP FIRMS

Baroda Academy 11 Inventing Methods for Igniting Minds updated as on 15.03.2018

- On receipt of notice of retirement of a partner, branches should stop operations in the

- On receipt of notice of death, retirement or insolvency, exclusion or inclusion of a partner

Baroda Academy 13 Inventing Methods for Igniting Minds updated as on 15.03.2018

Few important characteristics or advantage of company is;

 Perpetual succession: An incorporated company never dies. It is an entity with perpetual

Baroda Academy 14 Inventing Methods for Igniting Minds updated as on 15.03.2018

On the Basis of Incorporation

On the basis of liability

a) Company limited by shares

b) Company limited by guarantee

On the basis of members

One Person Company

Baroda Academy 15 Inventing Methods for Igniting Minds updated as on 15.03.2018

PRIVATE LIMITED COMPANIES

Defined u/s 2(68) of Companies Act 2013:

(i) Restricts the right to transfer its shares;

Provided further that-

(A) Persons who are in the employment of the company; and

Baroda Academy 16 Inventing Methods for Igniting Minds updated as on 15.03.2018

PUBLIC LIMITED COMPANIES

a. is not a private company;

Provided that nothing in this clause shall apply to:

a) A holding company or a subsidiary company.

Some of the advantages enjoyed by the small companies are:

Important Documents in respect of limited companies: