Risk Management Division

General Instructions on Loans and Advances

Introductory:-

Efficient management of loans and Advances portfolio has assumed greater

significance as it is the largest asset of the Bank having direct impact on its
profitability. RBI has also been emphasising banks to evolve suitable guidelines
for effective management and control of credit risks.
Ensuring a healthy loan portfolio, Punjab National Bank has taken various steps
to bring its policies and procedures in line with changing scenario which aims an
effective management and dispersal of credit risks, strengthening of pre-sanction
appraisal and post-sanction monitoring systems.PNB has laid down detailed
guidelines to be followed while considering credit proposals, some of the
important are as follows:1. All loan facilities will be considered after obtaining loan application from
the borrower and compilation of Confidential Report on him/them and the
guarantor. The borrowers should have the desired background,
experience/expertise to run their business successfully.
2. Project for which the finance is granted should be technically feasible and
economically/commercially viable i.e. it should be able to generate
enough surplus so as to service the debts within reasonable period of
time.
3. Cost of the project and means of financing the same should be properly
assessed and tied up. Both under financing and over financing can have
an adverse impact on the successful implementation of the project.
4. Borrowers should be financially sound, enjoy good market reputation and
must have their stake in the business i.e. they should possess adequate
liquid resources to contribute to the margin requirements.
5. Loans should be sanctioned by the competent sanctioning authority as per
the delegated loaning powers and should be disbursed only after
execution of all the required documents.
6. Projects financed must be closely monitored during implementation stage
to avoid time and cost overruns and thereafter till the adjustment of the
bank loans.
Banks extends loan facilities by way of fund-based facilities and /or non-fund
based facilities. The fund-based facilities are usually allowed by way of term
loans, cash credit, bills discounted/purchased, deemed loans, overdrafts, etc.
Further PNB also provides non fund-based facilities by way of issuance of inland
and foreign letters of credit, issuance of guarantees, deferred payment
guarantees, bills acceptance facility under SIDBI Bills Rediscounting Scheme etc.
The foregoing list contains the usual types of facilities undertaken by the bank. In
case loan application is received for any particular facility which is not

specifically mentioned above, the same should be forwarded to controlling

offices for consideration, provided the same can be transacted within the overall
policy of the bank.
The usual types of facilities sanctioned by the bank to the borrowers, as also
other aspects like project appraisal, Post sanction follow up, Management of
NPAs, Documentation, Limitation etc.

Overdrafts and Demand Loans:

Overdrafts:All overdrafts accounts are treated as current accounts. Normally, overdrafts are
allowed against the banks own deposits, government securities, approved
shares and/or debentures of companies, life insurance policies, government
supply bills, cash incentive and duty drawbacks, personal security etc.
Overdraft accounts should be kept in the ordinary current account head at
branches. Temporary clean overdrafts in current accounts should be maintained
in the ordinary current account ledgers.

Demand Loans:A demand loan account is an advance for a fixed amount and no debits to the
account are made subsequent to the initial advance except for interest,
insurance premia and other sundry charges. As an amount credited to a demand
loan account has the effect of permanently reducing the original advance, any
further drawings permitted in the account will not be secured by the demand
promissory note taken to cover the original loan. A fresh loan account must,
therefore be opened for every new advance granted and a new demand
promissory note taken as security.
Demand loan would be a loan, which is repayable on demand in one shot i.e.
bullet repayment.
Generally, demand loans are allowed against the Banks own deposits,
government securities, approved shares and/or debentures of companies, life
insurance policies, pledge of gold/silver ornaments etc. A separate account for
each demand loan should be kept in the appropriate demand loan ledger.

Term Loan:Term loans are sanctioned for acquisition of fixed assets like land, building,
plant/machinery, office equipment, furniture-fixture, etc., for purchase of

transport vehicles & other vehicles, for purchase of agricultural equipment,

machinery & other movable assets e.g. tractors, pump sets, cattle, etc. Under
various schemes of agricultural advances introduced time to time, for purchase
of house, consumer durables, etc. Under special schemes introduced time to
time.
The term loan would be a loan, which is not a demand loan and is repayable in
terms i.e. in instalments irrespective of period or the security cover.
Terms loans are generally granted for periods varying from 3 to 7 years and in
exceptional cases beyond 7 years and in exceptional cases beyond 7 years. Term
loans for infrastructure projects can be allowed even with longer repayment
period. The exact period for which a particular loan is sanctioned depends on the
circumstances of the case.
Term loan would be a loan which has a specified maturity which may be payable
in instalment or in bullet form. Further, short term loans with maturity upto one
year be treated as demand loan and classified accordingly. As per the guidelines
short term loans are allowed for maximum tenor upto one year.
The basic difference between short-term loan facilities and term loans is that
short-term facilities are granted to meet the gap in the working capital and are
intended to be liquidated by realisation of assets, whereas term loans are given
for acquisition of fixed assets and have to be liquidated from the surplus cash
generated out of the sale of the fixed assets given as security for the loan. This
makes it necessary to adopt a different approach in examining the application of
the borrower5s for term credits.
APPRAISAL OF TERM LOANS:Assessment of earning potentials and generation of cash surplus is the vital
ingredient in the appraisal of term loans. The unit should make enough surplus
earnings after meeting all the expenses, taxes and other necessary provisions
and the same should be adequate for servicing the loan and interest thereon
within a reasonable period of time. The appraisal of term loan broadly involves
an analytical assessment of the following:
I.
II.
III.
IV.

Purpose, cost of project and how it is to be tied up,

Future trends of production and sales,
Estimates of costs, expenses, earning and profitability, and
Cash flow statements during the period of the loan.

Appraising proposal for the term loan, the following four fundamentals are
follows:I.
II.
III.
IV.

Technical feasibility of the project.

Economic viability of the project.
Financial viability of the project.
Managerial competence