Академический Документы
Профессиональный Документы
Культура Документы
LOAN POLICY-2014-15
The Loan Policy document of the Bank has been revised taking into consideration
changes in our operating environment, changes in RBI regulations and the changing
priorities of the Bank. The revised Loan policy document will remain operative until the
next review. The Policy provides for the Banks approach to sanctioning, managing and
monitoring credit risk and applies to all types of lending.
2. Branches are advised to retain the Loan Policy Document as part of their branch
document.
Please bring the contents of this circular to all concerned and be guided accordingly.
M.P. SRIDHARAN
GENERAL MANAGER (RM & CPP)
INDEX UNDER:
L Loan Policy 2014-15 Credit Policy & Procedures Department
R Revision of Loan Policy Circular No.001/2015-16 dated 09.04.2015
1 Introduction 6
Exposure levels 8
category of borrowers
7 Review/renewal of advances 41
9 Delegation of powers 49
other charges)
NPA Management 54
15 Advances to Mid-corporates 66
Export credit 78
22 Corporate Loans 82
1.1 State Bank of Mysore (SBM) Loan Policy (hereinafter referred to as The Loan
Policy or The Policy) is aimed at accomplishing its mission of all round growth
with maximum profits, a position of pre-eminence in banking, committed to
excellence in customer service, shareholder and employee satisfaction, with
continuing emphasis on its Development Banking role, achieved through a skilled
and committed workforce and technological upgradation.
1.2 The Loan Policy of the bank has successfully withstood the test of time and
with its in-built flexibility, been able to meet the challenges in the market place.
The policy exists and operates at both formal and informal levels. The formal
policy is well documented - in the form of circular instructions, periodic
guidelines and codified instructions, apart from the Book of Instructions, where
procedural aspects are covered in detail.
1.3 The policy, at the holistic level is an embodiment of the bank's approach to
sanctioning, managing and monitoring credit risk and aims at making the
systems and controls effective. It is guided by the best practices of
commercial prudence, the highest standards of ethical norms and the
requirements of national priorities.
i) The Policy applies to all kinds of lending, subject to the general or special
directives of RBI / Government of India, as also to the prudential and other in-
house guidelines applicable to all corporate credit exposures of the Bank.
ii) It aims at spotting and seizing opportunities and revamping our products
and delivery mechanism as well as innovating new products ahead of
competition.
vi) Optimum/ maximum exposure levels are set out in the Policy to different
sectors in order to ensure growth of assets in a balanced and orderly manner.
vii) The Policy provides for a comprehensive Credit Risk Assessment system
that rates each potential / existing asset above a cut off level and also lays
down maximum risks / hurdle rates (in terms of Credit Risk Assessment
parameters) for new/ additional exposures.
viii) Bank's approach to Export Credit and Priority Sector Advances and to
specific groups of advances covering emerging opportunities such as Mid-
Corporates, Retail, etc are set out in the Policy.
ix) The Policy lays down norms for take over of advances from other
banks/FIs.
xi) The Policy aims at continued growth of assets while endeavoring to ensure
that these remain performing and standard. It simultaneously also aims at
continued improvement of the overall quality of assets at the portfolio level.
1.5 The Board of the bank is the apex authority in formulating all matters of policy
in the bank. The Board has approved setting up of Credit Risk Management
Committee (CRMC) of which Top Management are members, to deal with all
the issues relating to credit policy and procedures on a bank-wide basis.
1.6 The power to make any amendment to the loan policy vests with the Banks
Board.
1.7 The Loan Policy is based on guidelines issued by Reserve Bank of India from
time to time. Not withstanding the provisions contained in the Loan Policy,
RBI guidelines would be effective as and when they are revised.
2.1.1 Loan Policy recognizes the need for measures aimed at better risk
management and avoidance of large concentrations of credit risks. With this in
view, limits have been prescribed for Banks exposure to a single borrower, group
of borrowers, specific industry / sector, etc.
2.1.2 The primary guiding factors for fixing ceiling on exposures are the
prudential norms prescribed by RBI, which currently stand at 15% of capital
funds (Tier-I and Tier-II capital) for single borrower and 40% of capital funds for a
group (up to 20% for single borrower and 50% for a group provided the
additional exposure is on account of infrastructure projects in specified sectors).
However, in respect of Oil Companies who have been issued Oil Bonds (which do
not have SLR status) exposure ceiling of twenty five percent of the capital funds
has been prescribed by RBI. The Bank may also, in exceptional circumstances,
with the approval of the Board, consider enhancement of the exposure to a
borrower up to a maximum of further 5% of capital funds, subject to the
borrower consenting to the Bank making appropriate disclosure in the Annual
Report.
2.1.3 Capital Funds would comprise of Tier I and Tier II capital as on 31st March
every year and any fresh capital infusion as per RBI norms.
2.1.4 The exposure limits will be applicable even in the case of lending under
consortium arrangements.
2.1.5 The group to which a particular borrowing unit belongs will be decided on
the basis of relevant information available to the bank, the guiding principle
being commonality of management and effective control. In case of a split in
the group, if the split is formalised, the splinter groups will be considered as
separate groups. In case of doubt regarding bonafides of the split, a reference
will be made to RBI for a final view in the matter to preclude the possibility of a
split being engineered in order to prevent coverage under the group approach.
2.1.6 Exposures between Bank and other banks, which are outside the prudential
exposure norms, would be determined, bank-wise, as per the Bank Exposure Risk
Index (BERI) model. A review as per the model would be undertaken at yearly
intervals.
2.2.1 Rehabilitation of Sick / weak industrial units: The ceilings on single / group
exposure limits would not be applicable to existing / additional credit facilities
(including funding of interest and irregularities) granted to weak / sick industrial
units under rehabilitation packages.
2.2.2 Food Credit: Borrowers to whom limits are allocated directly by Reserve
Bank, for food credit, will be exempt from the ceiling to the extent of such
allocation.
2.2.4 Loans against own Term deposits: Loans and advances granted against the
security of banks own term deposits may be excluded from the purview of the
exposure ceiling.
2.3.1. Exposure shall include credit exposure (funded and non-funded credit
limits) and investment exposure (including underwriting and similar
commitments) and off-balance sheet exposure namely viz. Foreign Exchange
forward contracts and other derivative products i.e. interest rate contracts and
gold contracts etc.
2.3.1a The sanctioned limits or outstanding, which ever are higher shall be
reckoned for arriving at exposure limit. Non fund based exposure will be
reckoned at 100 percent of the limit or outstanding whichever is higher, except
off-balance sheet items where exposure should be considered on the basis of
credit conversion factors advised by RBI from time to time. In respect of fully
disbursed TLs only outstanding are reckoned without any reference to the limit.
2.3.2. Forward contracts in foreign exchange and other derivative products (like
currency Swaps, options etc) would need to be included at their replacement cost
value to arrive at borrowers exposure, for which RBI has prescribed that Current
Exposure Method need to be followed, for which operative guidelines are being
issued.
2.4. SUBSTANTIAL EXPOSURES (Exposure limits of the bank)
2.4.1 While prudential exposure norms would be the guiding factor for
monitoring credit concentrations in terms of exposure as defined by RBI, the
following levels of exposures will be deemed to be substantial exposures for
triggering internal monitoring mechanism:
Loan Policy 2014-15 9
Single borrower in excess of 7.50% of Banks capital funds Tier I plus Tier
II
2.4.2 Substantial exposures norms are in-house norms set within the prudential
norms and are intended to help in monitoring credit concentrations. These
norms should not be deemed as a cap on further exposures and should not come
in the way of booking bankable business. The substantial exposure norms should
be indicated in the loan proposals but no separate sanction is deemed necessary.
2.5.1. In addition to the above the following exposure levels have also been
fixed.
2.5.2 The caps include aggregate of fund-based and non-fund based (excluding
facilities against specified securities but including off-balance sheet
derivative exposures.)
2.5.3 The above exposure ceilings under (i), (ii) and (iii) will not include LC bill
discounting limits that may be sanctioned to constituent borrowers and
which will be considered as exposure beyond the specific ceilings
proposed above.
2.5.4 For exposure beyond this ceiling, specific approval of the EC of the Board
has to be obtained on a case to case basis.
2.6.1 Term Loans (loans with residual maturity of over 3 years) should not in the
aggregate exceed 35 percent of total exposure (Fund based and Non-fund based)
of the Bank. Term loans include all term loans irrespective of the segment but
with a residual maturity of over three years. Banks term loan exposure to a
single project would be guided by prudential / internal substantial exposure
norms, asset liability management policy and the ceiling of 35% of total exposure
(Fund based and Non fund based) for aggregate term loan.
2.6.2 Long Term loans with residual maturity of 10 years and above should not
exceed 30 % of total Loan Book (as ALM Policy)
2.6.3 Credit Risk Management Department would review the term loan portfolio
with reference to the above ceiling (to the Board) at half yearly intervals.
2.7.2 Specific industry wise ceiling as a share of total Fund and Non-Fund based
exposure of the Bank is furnished in the following table.
However all the operating units will verify the ceiling as may be revised by IRMD
from time to time.
Horticulture 7%
Sugar 2.50%
Cement 5%
Textiles 8%
Automobiles 5%
Petrochemicals 5%
Petro-refining (Petroleum) 5%
Pharmaceuticals 5%
Coal 5%
Food Processing 5%
Leather 5%
Metal (Non-ferrous) 5%
Hotel 5%
Infrastructure 20%
b).Hospitals 1%
c)Telecom 2%
e) Ports 0.75%
f) Education 1.5%
Rubber 5%
Fertilizer 2.50%
Information Technology 5%
Entertainment (Film) 1%
2.8.1 Exposure to infrastructure industry (fund based and non fund based) not to
exceed 20% of total Fund and Non-Fund based exposure of the Bank of which
term loans to infrastructure shall not exceed 17.5% of total Fund and Non-Fund
based exposure.
Any credit facility in whatever form extended by lenders (i.e. banks, FIs or
NBFCs) to an infrastructure facility as specified below falls within the definition of
infrastructure lending. In other words, a credit facility provided to a borrower
company engaged in,
developing or
Any infrastructure facility that is a project in any of the following sectors, or any
infrastructure facility of a similar nature:
1.Transport
2. Energy
i. Electricity Generation
ii. Electricity Transmission
iii. Electricity Distribution
iv. Oil pipelines
v. Oil/Gas/Liquefied Natural Gas (LNG) storage facility (includes strategic
storage of crude oil)
vi. Gas pipelines (includes city gas distribution)
4. Communication
each.
2.8.3 In the case of individual and group of borrowers, the prudential and internal
substantial exposure norms will be applicable.
2.8.5 The Banks Credit Risk Management Committee (CRMC) will continue to
review the arrangement from time to time, and further revisions will be
The Bank generally assumes exposure on highly reputed builders who adhere to
National Building code (NBC) formulated by the Bureau of Indian Standards for
safety of buildings, especially against natural disasters.
2.10.2 The exposure of the Bank to a single NBFC/ NBFC- AFC (Asset Finance
Companies) should not exceed 10% / 15% respectively of the Banks Capital
funds as per its last audited balance sheet. Bank may however, assume
exposures on a single NBFC/ NBFC AFC upto 15%/ 20% respectively of its
capital funds provided the exposure in excess of 10% / 15% respectively is on
account of funds on-lent by the NBFC / NBFC-AFC to the infrastructure sector.
NBFC Company, which is accepting public deposit and which had already
contributed to the capital of a partnership firm or was a partner of a partnership
shall seek early retirement from the partnership firm.
Banks exposure to capital market shall not exceed 40 percent of its net worth
(as defined by RBI) as on 31st March of the previous year. This ceiling of 40%
would apply to both fund based and non-fund based exposure to capital market
in all forms, as indicated by RBI in the guidelines issued in this regard.
Also within the overall ceiling of 40%, the Banks exposure to stock brokers both
fund based and non-fund based shall not exceed 10% of its net worth as on
March 31 of the previous year.
2.11.6 The Bank will formulate from time to time lending schemes/ policies
relating to:
2.11.7 The exposure norms for investment in shares, bonds and debentures of a
corporate, subordinated debt instrument, venture capital, underwriting of
corporate shares and debentures, underwriting of bonds of PSUs etc. would be
guided by Banks investment policy.
2.11.8 Commodity Exposure: quantitative ceilings fixed for exposure under both
fund based and non-fund based limits, in respect of exposure to the following
sectors / industries are as follows:
2.12.1 The total non-fund based exposure, at the whole-bank level, will not
exceed twice the level of the total fund based exposure. Periodical review of the
non-fund based exposure shall be carried out by the Credit Risk Management
Department, along with Portfolio analysis by the Risk Management Department.
b. Interchangeability between fund based limits (i.e. between two fund based
limits) and also between non-fund based limits is permitted subject to detailed
operative instructions issued from time to time.
2.12.3 Banks exposure to non fund based facilities in the form of buyers credit /
suppliers credit / letter of comfort (LoC) not to exceed 25% of Banks capital
funds.
Capex related LoC may be issued over and above the ceiling prescribed with prior
sanction, by obtaining higher cash margin
2.13.1 Banks Board will from time to time formulate a policy on unsecured
exposures and inter alia fix, a quantitative ceiling for such exposures. RBI has
defined unsecured exposure as an exposure where the realizable value of the
security (primary plus collateral), as assessed by the Bank/approved valuers
/Reserve Banks inspecting officers, as ab-initio not more than 10% of the
outstanding exposure.
2.13.2 Exposure shall include all funded and non funded exposure (including
under writing and similar commitments)
2.13.4 Banks Policy: Unsecured exposure (as defined by RBI) should not
exceed 25% of Banks outstanding total exposures. Quarterly reviews in this
regard will be submitted to the Board by the CPPD Department.
2.13.5 The norms and approach for extending unsecured loans to corporates
are as per Annexure-1.
3.1 General
The Bank has in place a well-established process of credit appraisal that has
developed and evolved over a period of time. The fundamental purpose of credit
appraisal in the Bank has been two fold. First, to be able to take an informed
decision as to the credit worthiness of any proposal; whether it is at all prudent,
worthwhile and desirable for the Bank to take a credit exposure on the applicant
entity. And thereafter, where a positive decision is arrived at in this regard, to be
able to assess the extent and nature of such credit exposure, the conditions on
which such exposure is acceptable and the pricing at which it is considered
prudent to operationalise such a credit relationship.
3.3 Having decided the proposal, as a reasonable and acceptable business risk,
a bankable proposition; the next step involves assessing the nature and extent
of the proposed exposure. The Bank provides a range of debt instruments
including all types of term and working capital facilities, each of which can be
structured either as fund based products or non-fund based products or a
combination of both. It is our effort to combine these with a range of payment
and collection platforms that are off the shelf or tailor made to meet individual
requirements and seeks to provide our customers with a complete solution to all
their financial requirements.
3.4. While the Bank plays a key role in providing working capital finance, the
share of term loans in the advances portfolio is also on the increase, forming a
significant base as the Bank continues to exhibit robust appetite for project and
retail lendings.
3.5 The assessment of working capital is done through the Projected Balance
Sheet Method (PBS), Cash Budget Method or Turnover Method.
3.6 Under the PBS method, the fund requirement is computed on the basis of
borrowers projected balance sheet, the funds flow planned for the
current/following year and examination of the profitability, financial parameters
etc. The key determinants for the limit can be, interalia, the extent of financing
support required by the borrower and the acceptability of the borrowers overall
financial position including the projected level of liquidity. The projected bank
borrowing thus arrived at, is termed as Assessed Bank Finance (ABF). This
method is applicable for borrowers who are engaged in manufacturing, services
and trading activities and who require fund based WC finance of above `5 Crores.
3.7 Cash Budget Method is used for assessing WC Finance for seasonal industries
like sugar, tea and construction activity. This method is used for sanction of ad
hoc WC limits. In these cases, the required finance is quantified from the
projected cash flows and not from the projected values of current assets and
current liabilities. Other aspects of assessment like examination of funds flow,
profitability, financial parameters, etc, are also carried out.
After due appraisal and assessment, appropriate authority, as laid down in the
Scheme of Delegation of Financial Powers for advances, sanctions the credit
facilities.
Such sanctions, if not availed within the time period specified, would lapse and
require revalidation. Such revalidation to be approved by the respective
sanctioning authority except in the case of sanctions by EC, where HOCC-I is
vested with the powers to revalidate such sanctions. If documentation has been
completed, the same is to be treated as disbursed and no further revalidation is
required.
Working Capital Demand Loan (WCDL): The carving out of WCDL within the
overall CC /FBWC limit sanctioned is vested with the GM Network, in respect of
EC/HOCC/NWCC sanctions. However, with respect to pricing the matter is to be
put up to the Pricing Committee.
Such sanctions, if not availed within time period specified, would lapse and
require revalidation. This provision has been introduced in order to ensure
against changes in market conditions and/or industry prospects adversely
impacting on terms of sanction such as quantum of exposure, security
covenants, pricing, etc.; especially pricing.
Quantitative standards
3.13 The basic quantitative parameters underpinning the Banks credit appraisal
and the levels that are desired are as under :
3.14 While these are indicative levels, there cannot be a definitive benchmark, as
acceptable levels are case specific, guided by the nature, size and scope of the
project. .
While CRA takes care for the financial risk elements / parameters, additional
approval for variation in the prescribed parameters need not be obtained
separately. As such, the following procedures to be adopted while financial ratios
are below the prescribed level:
3.16 Letters of Credit are essentially instruments that provide comfort to the
seller in a commercial transaction and facilitate availment of sundry credit from
the market. Letters of credit give ones borrowers option of availing credit
directly from the market, when the cost and conditions of credit from the market
are more advantageous and hence preferable to fund based bank finance. It is
therefore necessary, while sanctioning a borrower the facility of letters of credit
that aggregate of fund based working capital finance and LC facility is
commensurate with the projected build up of chargeable current assets.
3.17 It needs to be ensured that the Bank would open letters of credit (LCs),
issue guarantees/acceptances and discount bills under LCs only in respect of
genuine commercial and trade transactions of borrower-constituents who have
been sanctioned regular credit facilities by the Bank. In terms of RBI guidelines,
branches should not discount bills for non constituent borrowers.
In the case of non constituent borrowers, extant RBI guidelines for bill
discounting will apply. However, wherever L/Cs are restricted to our Bank, bills
under such L/Cs may be discounted under intimation to the existing bankers.
3.18 In the case of non constituent borrowers, the following requirements are to
be complied with so that these borrowers will be borrower-constituents of our
Bank who have been sanctioned regular credit facility by the Bank:
2. The borrowers existing bankers are separately and duly advised of the
Bank having sanctioned this facility to the borrower.
3. All due formalities under the KYC guidelines are meticulously and fully
complied with.
3.19 Bank would not open LCs and purchase / discount / negotiate bills bearing
the without recourse clause. Bank would not ordinarily discount bills drawn by
front finance companies set up by large industrial groups on other group
companies. While discounting bills of services sector, Bank would ensure that
actual services are rendered and accommodation bills are not discounted.
3.20 In respect of rediscounting of bills under LCs of other Bank with full
recourse, maximum ceiling to be fixed at `2500.00 crores, with a ceiling of
`1500.00 crores per Bank. Exposure to be taken only on PSBs and other Banks
with a minimum rating of AA.
Bank guarantees
3.21 Bank as a general rule, will limit itself to the provision of financial
guarantees and exercise due caution with regard to performance guarantee
business. BGs will generally be issued / renewed valid for a period not exceeding
18 months at any one instance. If BGs are to be issued for a longer period an
authority structure for according administrative clearance for this is in place.
BGs originally issued for period less than 18 months but that have been
subsequently extended crossing in aggregate the 18 months cut off will also
attract administrative clearance. No BG should normally have a maturity of more
than 10 years. Bank may consider issuing BGs beyond maturity of 10 years only
against 100% cash margin and with prior approval of the competent authority
specified in this regard.
3.23 Bank will issue BGs with an automatic renewal clause only to select
beneficiaries, such as customs authority, courts and overseas project owners in
respect of projects exports.
3.24 Normally all BGs will be secured by a charge on the assets (current and / or
fixed) of the applicant. Unsecured BGs, where considered exceptionally, will
generally be for a shorter period and for relatively small amounts.
3.25 Banks liability under BG is absolute, and independent and exclusive of any
other contract entered into with the constituent. Thus, the Bank is obliged to pay
to the beneficiary without delay and demur the amount of the BG on its
invocation in accordance with the terms and conditions of the guarantee deeds.
Only when the Bank has received an order or restraint / injunction from a
competent / appropriate court, will the Bank hold payment under the BG. In such
cases, the liability of the Bank under the BG will continue, till the court case is
decided, notwithstanding a shorter period of validity as may have been
stipulated in the guarantee itself.
3.26 The Bank will not execute guarantees covering inter-company deposits /
loans. BGs will also not be issued for the purpose of indirectly enabling the
placement of deposits with non-banking institutions.
3.27 Banks performance in regard to the non fund based business will be
reviewed at half yearly intervals by IBD and submitted to the Board.
3.28 As per RBI guidelines, Banks may issue guarantees favouring FIs/other
banks/other lending agencies for loans extended by them. However, given the
funding capabilities of our Bank, such guarantees are not proposed to be issued
for domestic operations. The Bank will also not undertake the business of co-
acceptance of bills of its constituents. This approach would be reviewed from
time to time.
As lending bank :
3.29 Bank may extend fund-based and non fund-based credit facilities against
guarantees issued by other banks/FIs.
The Kyoto protocol which came into force on 16th Feb. 2005 established a
mechanism for companies and governments in developed countries to contribute
towards their fight against global warming by purchasing Certified Emission
Reductions (CERs), more commonly called as carbon credits, from developing
countries. The Bank has sensed a business opportunity in this development and
has approved a policy for financing carbon credits. An interest concession of 10
bps below the eligible / sanctioned pricing will be extended to projects that
contribute to sustainable development.
3.35 Hedging of forex risks: As mandated by RBI, the Bank has a separate Board
approved Hedging Policy in place.
Loan Policy 2014-15 29
3.36 Verification of bonafides of Chartered Accountant firms and Chartered
Accountants: RBI has issued a letter stating that Chartered Accountants or the
firm on whose behalf the CA has issued the Certificate for having audited
financial statements of firms was found to be non existent in some cases. Hence
it should be ensured that Chartered Accountant and / or the Chartered
Accountant Firm who/ which certifies the audited financial of the borrower is in
existence and the details are furnished in C&I circular no.16/ 2009-10 dated
07.07.2009.
An annual review of the compliance with the FPCL will be put up to the Board by
CPP Deptt.
A. Unless sanctioned by the EC, Bank should not grant loans and advances
aggregating . `25.00 lacs and above to :
c) Any company in which any of the directors of other banks* holds substantial
interest or is interested as a director or as a guarantor
B. Unless sanctioned by the EC Bank should also not grant loans and advances
aggregating ` 25 lakhs and above to
c) any firm in which any of the relatives as mentioned in (a) & (b) above is
interested as a partner or guarantor; and
4.1. SBM has well established systems and procedures for documentation in
respect of all credit facilities. These have been drawn up and have evolved over
a period of time keeping in view the ultimate objective of documentation which is
to serve as primary evidence of the debt owed by the borrower, and the fact of
the guarantee by the guarantor where applicable, for use in any subsequent
dispute between the Bank and the borrower and/or guarantor. Documents also
form the basis for enforcing the Banks right to recover the loan amount together
with interest thereon through a court of law or under SARFESI Act where all other
recourses have failed. Accordingly, correctly compiled, executed and maintained
documents ensure that the:
Owing of the debt to the Bank by the borrower is clearly established by the
documents.
Charge created on the borrower's assets as security for the debt is
maintained and enforceable, and
Bank's right to enforce the recovery of the debt through court of law is not
allowed to become time-barred under the Law of Limitation.
4.3 Keeping the above broad objectives and the documentation process in view,
the Bank has devised standard documents in most cases for various types of
loans sanctioned to the borrowers, either by the Bank alone or as part of a
Multiple Banking arrangement. Wherever standard specimens have not been
devised, documents are suitably drafted on a case-to-case basis with the help of
in-house legal department, and on occasions with the help of reputed outside
solicitors. Furthermore, changes in the documentation procedures and the
implications involved are circularized from time to time to all the
branches/offices so that those who are responsible for obtaining and
safeguarding the documents are made fully conversant with them. This is
further strengthened through on-the-job training at the branches and through
formal training at the bank's Learning Centers.
Unconditional Cancellability clause which gives the Bank the right to cancel the
sanctioned limit without reference to the borrower at any time, needs to be
accepted by borrowers to give effect to the Internal Capital Adequacy Framework
guidelines of the RBI and would form part of T&C letter of the loan documents.
5.1 The Bank has in place an effective post-sanction process to facilitate efficient
and effective credit management and to maintain high level of standard
assets. Broadly, the objectives of post sanction follow up, supervision and
monitoring are as under:
While ensuring the end-use of funds by borrowers, Banks should, not only rely on
certification from Chartered Accountants, but also ensure compliance with
measures, some of which are mentioned below by way of illustration:
Bank will also retain the right to get forensic audit conducted whenever it is
prima facie satisfied that there is a case for such investigative audit, to detect
siphoning/diversion of funds or other malfeasance.
A system of loan review styled Credit Audit which interalia covers audit of
credit sanction decisions at various levels has been implemented. Presently all
accounts with total indebtedness of `2 crores and above are subjected to credit
audit. The Credit Audit system serves as an effective control on the system of
sanction of loans in the bank through appropriately delegated powers.
Eligibility
Frequency
a)Yearly:
Accounts with credit limits above `2 crore but below `25 crores.
b) Half Yearly ;
iii) All other accounts of `5 crores and above with Credit Rating of SB-8 and
below, or accounts where Credit Rating slips by two notches or more, irrespective
of the rating.
Others conditions
6.1 The Bank has a well-defined Loan Policy and over the years our policy and
procedures in this regard have been enunciated, practiced and refined as a result
of evolving concepts and actual experience. Revised Credit Risk Management
and Credit Risk Mitigation and Collateral Management Policy approved by the
Board on 29.11.2014 is in place. Our policy and procedures have since been
aligned to the Standardized Approach for credit risk under Basel II from
01.04.2008 and the Bank is gearing itself to adopt Internal Rating Based
Approach. Simultaneously the Bank has also adopted Basel III guidelines with
effect from 01.04.2013 and is in transitional arrangement period. Basel III
guidelines are expected to be fully implemented by the year 2019.
6.3 The Bank undertakes the following function in the process of identifying and
assessing the credit risk underlying a proposal:
Developing and refining credit risk assessment models used for taking
Commercial banking and retail banking exposures.
6.5 For each credit proposal, a credit rating is assigned using the internal credit
rating system. The Bank as of now has a unified Credit Risk Assessment (CRA)
System, which is used for assessing the credit risk of borrowers as well as
facilities viz., working capital, term loan and non-fund based exposures etc., to
commercial and institutional borrowers, MSME and agriculture segments for
exposure exceeding `25 lacs. The rating process reflects the risk involved in the
facility/borrower and would be an evaluation of the borrowers intrinsic strength.
The rating requires to be reviewed periodically and updated, atleast annually or
as specified in the loan policy.
6.5a. The rating scale would be used by the Bank to keep a close track of
deteriorating credit quality and decide on the remedial measures warranted.
6.6 The credit risk rating will be worked out by the respective
Branch/Networks/Credit Processing Cells as applicable, as soon as the audited
balance sheet of the company is received. The internal credit risk rating thus
arrived at will be independently validated and approved by a separate
Committee, set up for this purpose. This process of validation and approval is
made prior to sanction / renewal / enhancement of the credit facilities and
separated from the loan sanction process. This facilitates an independent and
objective risk rating mechanism that is not influenced by operational/budgetary
considerations.
In the case of SME advances of exposures of `25 lacs and above in addition to
the SME smart score, CRA rating also has to be undertaken to facilitate
comparison and inclusion in the Banks Rating Transition matrix which will be
used for estimation of Risk Components under IRB Approach.
6.7 The Bank has introduced a two dimensional rating model from 01.07.2008
with borrower rating and facility rating. The model includes a Simplified Model
for exposures from `0.25 crore to `5 crores and Regular Model for exposures
above `5 crore. While Simplified Model necessitates the computation of only the
borrower rating, the Regular Model provides both borrower rating and facility
rating.
6.7a. The CRA models adopted by the Bank take into account the various risks
categorized broadly into financial, business, industrial and management risks.
These risks are rated separately. The minimum score under various parameters
and hurdle rate below which increasing or taking exposures are normally not
permitted are specified. Currently no enhancements in credit limits or new
connections are to be considered in respect of accounts rated below SBM 4/SBM-
TL4 under the old CRA model and SB 9 (Hurdle Rate) under the new Models
subject to exceptions like availability of Central Government guarantees and / or
availability of a corporate guarantee of parent / group company which should
have a CRA rating of SB 9 and above (old rating SBM 4/ SBM TL 4 as against the
earlier hurdle rate of SBM 3/ SBM TL 3 and above). The actual models used, the
minimum scores under each head, the hurdle rates etc are reviewed and revised
at regular intervals.
6.8 Given the special features of NBFCs, as different from manufacturing units, a
separate credit risk assessment model has been put in place for assessing the
risk of exposure taken against NBFCs.
6.9.As per RBI guidelines, Bank uses a separate rating model to assess the credit
risk associated with lending to Banks. Such a rating model, called Bank
Exposure Risk Index (BERI) model has been developed and is operational in the
bank. The Bank has set Permissible Global Exposure Limits (PGEL) for Banks.
Credit Risk on Banks parent bank, SBI and other Associate Banks, is also assessed
as per this model to maintain arms length relationship with them as directed by
RBI.
6.10 CRMD undertakes reviews of Industry/ Sector exposure Setting Exercises for
select Industries at periodical intervals, which give specific policy prescriptions
and contain Quantitative parameters for handling portfolio in large/important
industries.
6.12 As the bank moves towards advanced approaches under the Basel II
document for credit risk, it would be necessary for the Bank to estimate the
above risk components based on the historical data of the Bank, construction of
transition matrix, application of appropriate conversion factors for unutilized
portion of the fund based exposures and non fund based exposures for providing
capital etc.
Bank has submitted its Letter of Intent to RBI for applying for migrating to
Advanced Internal Rating Based Approach for calculating Capital Charge for
Credit Risk. As a preparation for the application process, IRB compliant policies
relating to Credit Risk and the models needed for estimating values for risk
components have been developed. Suitable instructions regarding the conduct of
loans and advances portfolio in terms of IRB requirements shall be issued from
time to time.
6.16 The objective of setting risk based exposure limits in the portfolio is to
optimize the credit portfolio composition, after taking into account return
estimates and risk appetite defined by the Board.
6.18 The strategy to sanction NFB facilities to increase earnings will be properly
balanced vis-a-vis the risk involved and extended only after a thorough
assessment of credit risk.
6.19 The Bank is required to make provisions for country risk exposures as per
RBI guidelines. The data on country exposures are collected and monitored with
respect to the country exposure limits at periodical intervals by the Risk
Management Department. Fixing of the country exposure limits are reviewed at
yearly intervals and adherence to the same are reviewed and reported to the
Board/ RMCB at quarterly intervals.
6.21 CRMD has framed a credit risk mitigation and collateral management policy
based on the RBI guidelines which addresses (i) classification of credit risk
mitigants, (ii) acceptable credit risk mitigants (iii) documentation and legal
process requirements for credit risk mitigants, (iv) custody of collateral, (v)
insurance etc.
Miscellaneous
6.22 Other aspects of Credit Risk Management such as pricing of Loans, credit
approval authority, documentation, credit monitoring, verification of end-use
funds, review and renewal of credit facilities, managing of problem loans, credit
monitoring etc, have been discussed in detail elsewhere in the Loan Policy
document.
7.1 Working capital facilities are granted by the Bank normally for a period of one
year except in cases where the scheme permits and thereafter they are required
to be renewed each year i.e., fresh sanctions is accorded for limits. Where,
however, renewal is not possible for some reason, sanction for continuance of
limits is to be obtained in each case by reviewing the facility.
7.1a. Regular and ad hoc credit limits need to be reviewed / regularised not later
than three months from the due date/ date of ad hoc sanction. In case of
constraints such as non-availability of financial statements and other data from
the borrowers, the branch should furnish evidence to show that renewal/ review
of credit limits is already on and would be completed soon. However, where the
regular / ad-hoc credit limits have not been reviewed / renewed within 180 days
from the due date / date of ad-hoc sanction, it will render the account as NPA.
7.3 .a) All term loans in the C&I and MSME segment with limits/outstanding of `25
lacs and above, irrespective of their credit rating, including standard assets have
to be reviewed to the sanctioning authority at yearly intervals. In cases where
term loans as well as working capital credit facilities have been sanctioned to a
borrower, review of TL should form a part of the review/renewal of working
capital facilities.
7.3. b). All term loans in the C&I and MSME segment, where the project is under
implementation, and is under progress, irrespective of their credit rating,
including standard assets has to be reviewed to the sanctioning authority at half
yearly intervals, until the project is completed. Where there is a delay in the
implementation of the project, the term loan has to be reviewed to the
Sanctioning Authority at half yearly intervals.
7.3. c). Term Loans with limits of `25 lacs and above which are irregular on six
occasions in a year will be reviewed once in six months thereafter. Such review of
irregular Term Loans is in addition to the periodical review of the Special Mention
Accounts. The review is to be put up to controllers in the case of branch level
sanctions and to sanctioning authority in the case of others.
i) In the case of all listed companies with credit rating of SB 8 and below, a brief
review is to be put up on the basis half-yearly working results published by them,
duly incorporating comments such as extent of exposure, conduct of the account
etc. Such review is to be submitted to the sanctioning authority.
The sanction of term loans conveyed to branches shall be valid for six months
within which time the stages of acceptance of terms and conditions,
documentation and first disbursement will normally be completed.
If documentation is over:
7.7 In respect of new term loans and existing term loans, if and when they are
rescheduled, the following set of financial covenants is to be stipulated:
(a) Any adverse deviation by more than 20% from the stipulated levels in
respect of any two of the items (a) to (c) above penal interest to be
levied for the period of non adherence subject to a minimum period of one
year.
(b) Default in payment of interest/instalments to the Bank penal interest to
be levied for the period of such defaults.
Keeping this in view and with the objective of adding only good quality assets, a
set of norms / guidelines for C&I, SME/MSME and for AGL segments have been
laid down for takeover of advances.
b. The Borrower should be rated not below SB 6 on the basis of the audited
Balance Sheet not older than 12 months with a stipulation that the financial
score shall not be less than 40 out of the possible 65 and External Credit
Rating, wherever applicable, shall have to be BBB (investment grade) or
above (Both CRA & ECR norms to be complied with, wherever applicable).
c. The Units CRA rating must be in consonance with the latest industry outlook
by the CRMD, wherever applicable.
PARTICULARS AUTHORITY
For takeover of units complying Prior approval by sanctioning authority with the
with all prescribed norms: minimum authority of Assistant General Manager.
The authority structure for approving deviations in such cases is furnished below:
a. Take over proposals not Prior approval by one step higher than the
complying with prescribed sanctioning authority, with minimum
norms. sanctioning authority level at NWCC(*).
(*In case of take over proposals falling within the discretionary powers of the
Executive Committee, the deviations are to be approved by the EC only)
D. The operating units shall assess credit requirements of the unit to be taken
over independently by exercising more than the usual due diligence as
applicable to any credit proposal. Loans from Associate Banks and SBI are not to
be taken over. Besides, general guidelines as furnished below are to be
meticulously followed. Sanctioning Authority will take a call on non-compliance
with any of these guidelines, based on the reasoned recommendations made in
the appraisal/ assessment note.
1. Operating units should assess the requirements of the borrower and obtain
sanction for the proposed limits before actually taking over the outstanding
liability of the borrower from their existing bank/ FI. While doing so, the following
aspects should invariably be examined in each case of take-over:
3. Audited Financials should not be older than 12 months. But in all cases where
Audited Financials are older than 6 months, provisional financials not older than
3 months are to be obtained and analyzed to satisfy that the activity level and
profitability liquidity and solvency ratios are broadly in alignment with the
estimates/ projections important parameters such as Gross/ Net Sales, Inventory,
Receivables, Sundry Creditors, Unsecured Loans, Conversion of Share Application
Money into PUC, Additions to Gross Block may be certified by a Chartered
Accountant.
4. The unit should have earned net profits (post tax) in each of the immediately
preceding 3 years. If it does not have a track record for 3 years, it should have
earned profits for at least two years. In other words, units for takeover should
have at least two years of full fledged commercial operations backing their track
record.
6. When TLs are also being taken over, such TLs should have a prompt
repayment track record, without any restructuring/ reschedulement for at least
two preceding years. For takeover of existing TLs, the terms of repayment with
the existing lender from whom the loan is being taken over, to continue.
7. Term loans from State Financial Corporations may be taken over only
selectively.
c. Balance Sheet/ Audit report wherever applicable should be free from any
material adverse remarks from the auditors. Bank account statements. of six
months to one year old of the prospective customer to be perused to satisfy,
that transactions in the accounts, support the recorded/ estimated turnovers
as also the conduct of account is satisfactory.
d. A declaration should be obtained from the applicant unit that it does not
have any other credit facility in any Bank/ FI/ NBFC which is irregular and
there are no overdue statutory dues. Such a declaration should be supported
by a certificate from a Chartered Accountant.
e. The applicant unit also to declare details of credit facilities of its Associates
and Subsidiaries from the banking system. Credit Information Reports (CIRs)
on the IBA format to be obtained from their respective bankers. Inter unit
transactions commercial or otherwise, to be examined to satisfy that there
are no adverse features that impact risk profile of the unit.
f. Searches in the books of the ROC with regard to charges created and
satisfied on the assets of the unit, change in directors, capital structure and
major share holders etc along with verification of audited financial statements
should be carried out.
h. Verification of Income Tax, Sales Tax, Excise Returns etc as part and parcel of
strengthening due diligence and as a preventive vigilance measure also must
be carried out.
(These may be carried out through empanelled Technical Consultants/ other
professional such as Chartered Accountants, Company Secretaries and
Advocates etc., wherever necessary)
While the above list is illustrative, the operating officials must undertake the due
diligence exercise as warranted and considered relevant, ensuring to guard
against entry of marginal assets on to our books. The Operating Unit/ Branch
should record a note on due diligence carried out to their Controller, before
taking up the proposal for appraisal.
In respect of Agri segment, all agricultural term loans agricultural cash credits
with other Banks and Agricultural Credit Societies, Co-operatives are eligible for
take over, subject to the fulfilment of the following terms and conditions of take
over:
ii. Only Standard assets and regular accounts are eligible for take over. The
account should have been a Standard Account in the books of the other
Banks/Financial Institutions (FI) during the preceding two years.
iii. The term loans of incomplete nature are not eligible for take over.
iv. ATL with a minimum two years repayment programme left are only
eligible.
v. Advances of the borrowers falling outside the service area of the branch
are also permitted for take over, subject to observance of other
instructions.
vi. Crop loan converted Term Loans and Term Loans which are rephrased, are
not eligible for take over irrespective of their quantum.
vii. Take over from Associate Banks and SBI is not permitted.
viii. No dilution in the security in take over proposals is permitted.
ix. The maximum amount eligible for take over would be `50.00 lakhs.
However, administrative clearance should be obtained from the respective
sanctioning authority in case, loans above `50.00 lakhs are required to be
taken over.
x. Wherever prescribed norms for take over are met, no administrative
clearance is needed for take over. Otherwise administrative clearance
should be obtained as above.
xi. Additional norms for take over of Loans above `25 lacs
Loan Policy 2014-15 51
The advances to be taken over should be rated SB 6 or above (the
unit should score at least 60% in the financial parameters).
The unit should have earned net profits post tax in each of the
immediately preceding two years.
9.2 The two significant principles around which the scheme of delegation of
financial powers revolve are:
Powers are exercisable only in relation to the duties and
responsibilities specially entrusted to a functionary;
All sanctions are subject to report to the next higher authority.
9.3 The Scheme of Delegation of Financial powers for advances and allied
matters in the Bank has a graded authority structure. The Executive
committee of the Board (EC) has full powers for sanctioning all credit
facilities. The sanctioning powers have been delegated down the line to
Committees of officials at various administrative offices and to individual
line functionaries.
9.4 The powers for sanctioning credit facilities by various authorities have
been vested with them in terms of total indebtedness of the borrower.
Computation of indebtedness will include off balance sheet exposures
arising from derivatives and forward exchange contracts in addition to
fund-based and non-fund based exposures (i.e., LCs, guarantees etc.,).
9.5 Higher discretionary powers have been made available in the case of top
rated borrowers (usually SB1 and SB5) and functionaries across the
hierarchy are vested with such dual powers depending on the rating of the
borrower.
9.6 The Scheme is constantly updated and reviewed to factor in the demands
made on account of organizational restructuring, emerging challenges,
forces of competition, etc.
10.1 The maturity pattern of the Banks deposits and other liabilities ideally
determine the preferred maturity profile of its asset portfolio of which advances
are significant part. Traditionally, our resources have tended to concentrate
somewhat in the on demand to short and medium term deposits of 1 to 3 years
and 3 years to 5 years maturity buckets. In addition, we have CASA funds and
also float funds through drafts and similar transit funds. Correspondingly, our
asset maturity profile also ranges from WC finance, short term loans to loans of
longer maturity. Matching of varying maturity buckets in the Banks asset and
liability portfolios is done on an ongoing basis by the Banks ALCO.
10.2 Given the tilt towards shorter term maturities in liabilities against a
perceptible shift towards medium to long term lending, as a consequence of a
variety of emerging short term funding options available to corporate borrowers,
there is a felt need for regulated term lending.
10.3(i) Accordingly, the maturity of any term loan, including moratorium, should
not normally exceed 8 years except cases under CDR mechanism / rehabilitation
packages approved by the Bank, infrastructure loans, housing term loans (HTLs)
to individuals, education loans and agricultural term loans under approved
schemes. In case there are area specific schemes proposed by NABARD and
formulated by the HO, the Zonal Office committees may decide to add such
schemes also to the list of exempted category of agricultural term loans advised
by Agri Business Unit from time to time. The tenor is to be reckoned from the
day of first draw down.
i. The maturity of any loan should not normally exceed 8 years, (except in
the case of Housing Term Loans (HTLs) to individuals and Educational
loans, term loans for Infrastructure, restructured term loans).
iii. In case of infrastructure loans the maturity of the loans should not exceed
15 years including the moratorium period.
Loan Policy 2014-15 54
Loan Policy 2014-15 55
CHAPTER 11: PRICING
11.1 Pricing of loans / services in the Bank cover interest income and fee income.
In keeping with RBI guidelines, w.e.f. 01.07.2010, the Bank has decided to quote
a single base rate (i.e. BR) which is the reference rate below which the Bank will
not undertake any lending activity except the following permitted categories of
Advances.
a) DRI advances
f) Restructured loans, if some of the WCTL, FITL etc., need to be granted below
the Base Rate for the purpose of viability and there are recompense clauses.
11.2 Pricing of Banks loans and services are based on two very important
considerations. Minimum desired profitability and risk inherent in the
transactions. At the corporate level, the applicable price for a particular advance
or service is fixed taking into account the marginal cost of banks funds and
desired rate of return as calculated from indices like profitability levels and return
on capital employed. However pricing is also market driven. But the endeavour
shall be to see that pricing is invariably proportionate to risk. In case of
corporate relationship where the value of connections and overall potential for
profitability from a particular account are more important than a particular
transaction, the price is fine tuned even to breakeven level for the transaction. For
long-term exposures, the factors that weigh are the rate charged by the financial
institutions/ other banks, the period of exposure, pattern of volatility in the
interest rates and the expected movement of the rates in the long-term
perspective. The actual lending rates charged may be transparent and
consistent and be made available for supervisory review/scrutiny, as and when
required. Whenever concessions are to be extended, specific cogent reasons are
to be mentioned in the proposal along with the recommendations.
11.4 Changes in the Base Rate shall be applicable in respect of all existing loans
linked to the Base Rate, in a transparent and non-discriminatory manner.
11.5 The Bank can price loans at Fixed or Floating rate basis linked to the Base
Rate. However, the effective rate to be charged should be equal to or above the
Base Rate at the time of Sanction/ Renewal. Bank may also price floating rate
products by using any other market rate in a transparent manner. The floating
interest rate based on such external rate should however be equal to or greater
than the Banks Base Rate at the time of sanction/ renewal.
The Base Rate system would be applicable for all new loans and for those old
loans that come up for renewal. Existing loans based on the BPLR system may
run till their maturity. In case existing borrowers want to switch to the new
system, before expiry of the existing contracts, an option may be given to them
(on mutually agreed terms). Banks, however, should not charge any fee for such
switch-over.
Pricing Committee: Bank has put in place two Pricing Committees to examine post
sanction modifications in pricing in respect of high value advances.
11.7 The Bank will have a certain corpus for CP/ MIBOR linked loan products as
approved by Executive Committee of the Board of Directors from time to time. In
such cases, the interest rate to be charged are linked to market benchmarks (e.g
G-Sec rates, MIBOR etc.,) in a transparent manner and without making any
reference to BR subject to minimum of Base Rate
11.8 Bank has put in place a policy for reset of interest rates of term loans
extended both on floating and fixed interest rate basis, to factor in changes in
the interest rate scenario. The periodicity of reset is two years and renegotiation
of interest rate is based on well-defined triggers mentioned elsewhere in the
circulars.
11.9 All other loans are to be priced on the basis of banks BR with the pricing
being linked to grade of the risk in the exposure, tenor of loans etc.
11.10 The Bank has also adopted an appropriate authority structure to facilitate
competitive pricing of loan products. The authority concerned while exercising
the discretion take into consideration the risk rating of the loan asset, the trends
Loan Policy 2014-15 57
in movement of interest rates, market competition and overall business
considerations. HOCC I and HOCC II are vested with full powers for approving
competitive pricing within their respective areas of operation and are empowered
under a board approved policy, to delegate a certain level of discretion in pricing,
relating to specific products/category of borrowers in the unrated segment, to
the Zonal functionaries. The quantum of delegation depends on factors such as
degree of competition, market developments, target group, purpose etc. The
policy on competitive pricing is reviewed from time to time based on changes in
market condition. Bank has put in place two Pricing Committees to examine post
sanction modifications in pricing in respect of high value C & I advances.
11.11 Loans under consortium arrangement. Banks need not charge a uniform
rate of interest even under a consortium arrangement. Each member bank
should charge rate of interest on the portion of the credit limits extended by it to
the borrower, subject to the condition that such rate of interest is determined
with reference to its Base Rate.
11.14 Market related Service Charges and a discretionary structure that enables
branches to effectively face competition are in place. These are reviewed
periodically based on feedback from operating units and on changes in market
conditions.
12.1 General
12.1.1The Bank has separate NPA Management Policy which seeks to lay down the
policy on management and recovery of NPAs and proactive initiatives to
contain net NPAs.
12.1.3 In line with the RBI guidelines on preventing slippage of NPA accounts,
Bank has introduced a new asset category between standard and sub
standard, i. e Special Mention Accounts (SMAs) for internal monitoring and
follow-up in line with international practice.
12.1.6 The Bank also has put in place a mechanism for outsourcing of recovery
efforts, in alignment with RBI Guidelines for outsourcing of Financial Services, to
supplement the efforts of the Banks staff.
NWCC HOCC II
12.3 a. The Bank has laid down a policy on approach to sacrifices in case of
transfer of financial assets to Securitization Companies and Reconstruction
Companies (SCs/RCs) as each asset is unique in the context of circumstances
necessitating consideration of transfer to SC / RC as a recovery option.
b. The Bank has also laid down a policy in accordance with the RBI guidelines, for
sale of NPAs to Banks / FIs / NBFCs other than SCs / RCs.
Loan Policy 2014-15 60
c. Policy for purchase of Non-performing Assets (NPAs) from other banks under
consortium/multiple banking has been put in place to facilitate timely
restructuring and rehabilitation in high value and potentially viable accounts.
d The Bank has also laid down policy for sale of Non Performing Retail Assets of
the SME sector to ARCs, Banks, FIs and NBFCs on portfolio basis.
12.4 Viable units and where promoters show genuine interest in reviving the unit
will continue to be supported. In other cases, especially where promoters are not
cooperating, options to exit or reducing exposure will be actively explored, where
feasible. Where despite our best efforts in this regard, it is not possible to exit an
account or at-least to reduce our exposure, a reassessment of the situation will
be done and if necessary Bank will consider either an acceptable OTS or in its
absence, even consider recalling the account. Bank will examine the various
options and initiate measures as appropriate in a time-bound manner, as delays
in such situations far from helping matters are likely to lead to erosion of security
and increase in the ultimate quantum of the NPA.
12.4a. The following are some of the options which are to be considered in
potential NPAs / SMAs where viability is suspect:
12.5 Settlements through compromises (i.e. one time settlement of dues) will be
a negotiated settlement under which Bank endeavors to recover its dues to the
maximum extent possible. Detailed guidelines for compromise settlements are
part of the NPA Management Policy.
12.6 If settlement of dues through compromise is being negotiated with one unit
of a Group banking with us, it shall be the endeavor to minimize the sacrifices by
seeking support from the parent company / other Group companies. The
response of the Group towards such efforts on our part will be a major contributing
factor in deciding further exposures to the Group or to other individual units
within the Group.
12.7 In a compromise (i.e. one time settlement of dues- OTD) as the Bank agrees
to accept an amount less than the total amount due to the Bank under the
relative loan contract, in full and final settlement of dues as a general policy, it is
tantamount to cessation of lender borrower relationship with the borrowing unit,
its promoters and guarantors. Under ordinary circumstances, no fresh finance will
Pursuant to the directives of Govt of India, the provision for re-lending to farmers
who have settled their dues under compromise / SBM OTS / RBI OTS / write off is
also in place.
In terms of the Government of India directives, the Bank has adopted e-auction
for sale of assets charged to the Bank in respect of DRT proceedings to break
cartelization in auctions. Bank has put in place an e-auction platform for smooth
implementation and detailed operational guidelines are in place
12.9 The Bank recognizes that transfer of financial assets to third party entities
such as SCs / RCs would, in most cases, be at a substantial discount to the book
value of the asset / ledger balance. The Banks endeavor would be to optimize
recovery while taking into account not only the ledger balance but also other
aspects such as costs associated with continuing the account in our books
including cost of maintaining assets, loss on account of deterioration in the
quality of securities charged, opportunity loss due to non redeployment of locked
funds more profitably, etc. The quantum of sacrifice per se in terms of high
percentage of loan being written off in case of transfer/sale to such third party
entities would not hinder consideration of the offer.
12.11 The Bank would follow a policy of write off, including partial write offs,
subject to review from time to time on the basis of experience gained. Detailed
operative guidelines are in place. The policy of write of is not expected to dilute in
any way the follow-up of recovery. Written off accounts are to be parked in
Advances Under Collection Account (AUCA) in accordance with laid down
instructions. The structured mechanism prescribed for follow-up of accounts
parked in AUCA will be followed meticulously. Further, accounts in AUCA would be
considered as part of NPAs for internal monitoring at all levels.
Advances covered under the guidelines of Restructuring are classified into four
categories viz. advances extended to industrial units, advances extended to
industrial units under CDR, advances to SME and other restructured advances.
The major difference in the prudential regulations lies in the stipulation that
subject to certain conditions, the accounts of borrowers engaged in industrial
activities (under CDR Mechanism, SME Debt Restructuring Mechanism and
outside these mechanisms) continue to be classified in the existing asset
classification category upon restructuring. This benefit of retention of asset
classification on restructuring is not available to Consumer and Personal
Advances, advances classified as Capital Market and Real Estate exposures.
Data on defaults reported by the branches and originating units, or through the
Banks systems, will be used by CRMD for the estimation of PD.
Recovery and cost data, including material direct (which can be associated with
an individual recovery, e.g. legal costs) and indirect costs (which cannot be
associated with an individual recovery, e.g. administration costs), will be used by
CRMD for the computation of economic loss, cure rates and estimates of LGD.
Loan Policy 2014-15 63
Where the cost of recovery cannot be assigned to an individual exposure,
averages of recovery costs based on discretion and experience are required to be
used.
12.17 Outsourcing
13.2 Wilful default and action there against Bank will fully comply with RBI
guidelines on wilful defaulters and action thereagainst in terms of RBIs
definitions of wilful default, diversion & siphoning of funds and end-use of
funds. These instructions apply without any exception to all loan accounts
where the outstanding are `25 lacs or more. The identification of wilful default in
the Bank will be done by a Committee constituted for this purpose. The
identified borrower will be provided an opportunity to make a representation
before the Grievance Redressal Committee. At the end of this process, the name
of the borrower will be included in the list of willful defaulters to be advised to
RBI, when a decision has been taken to that effect.
13.4 Where possible, Bank shall adopt a proactive approach for a change of
management of the willfully defaulting borrowing unit.
13.5 Where FIs have significant stake and where the FIs take effective steps for
removal from the Board of a borrowing unit, a person identified as wilful
defaulter, the Bank shall also proactively support such steps.
13.6 No additional facilities shall be granted by the Bank to the listed willful
defaulters. Further, entrepreneurs/promoters of companies where the Bank has
identified siphoning/diversion of funds, misrepresentation, falsification or
accounts and fraudulent transactions shall be debarred from bank finance for
floating new ventures for a period of 5 years from the date the name of the
willful defaulter is published by RBI/CIBIL.
13.8 The approach envisages that the penal provisions are used in a transparent
manner and are not misused. A solitary or isolated instance will not be made the
basis for imposing penal action.
13.9 The Bank has also put in place a policy regarding extending finance to the
willful defaulters, in compliance with the guidelines issued by RBI from time to
time. Detailed operative guidelines in this regard are in place as under :
13.10 The Bank has put in place a procedure for deletion of the names of the
borrowers from the list of willful defaulters through the mechanism of reference
to the Committee constituted for this purpose at Zonal Office.
14.1 Deviations from the banks Loan Policy have been classified as `major and
`minor based on
14.2 Proposals with major deviations from the Banks laid down policies would be
required to be sanctioned by a higher authority, as given below:
In respect of accounts
falling under the powers of
NWCC - HOCC-II
In respect of accounts
falling under the powers of
HOCC I & II, HOCC-1 No change
Non-Corporate . ` 75 cr.
ZOCC
NWCC - HOCC II
HOCC-1 EC No change
* As per new rating model, SB 9 is the hurdle rate for new connections and
enhancement. Though not normally envisaged, deviations may be permitted up
to SB 10 and may be approved by an authority as prescribed above. In respect of
borrowers rated SB 11 and below, no deviation is to be considered.
9. Defaulter List
14.3. Any deviation not specifically mentioned in this section and under various
heads will be considered as minor deviation. The minor deviation will be
approved by an authority one step higher than the sanctioning authority except
15.2 As a strategic initiative, the Bank has been and will identify select emerging
industries that are likely to grow further in the near term. Such industries will
receive sharper focus to enable them the scale up their exposure and garner a
greater share of bankable business. Depending upon the market size,
opportunities and potential available in various geographical areas, the desired
direction in lending to these industries at various levels are also being spelt out.
16.1 MSME stands for Micro, Small & Medium Enterprises. The MSME
Development Act, 2006 has brought about changes in classification of
enterprises. The Act also provides for penalty to buyers for delayed payment to
SMEs and has also done away with the requirement for registration in the case
of Micro and Small Enterprises. The definition of MSME for Industrial and service
enterprises as under:
16.2 MSMEs are a very attractive segment for the Bank given their large number,
loyalty and potential for profitability. The primary needs of MSMEs are physical
proximity, timely credit availability, service and reliability, although different sub-
segments have different priority needs leading to differences in profitability
drivers.
16.3 With a view to increase our market share in MSME segment, by improving
our sales and marketing strategies and to meet the demand of our customers for
more sophisticated services at competitive prices and to increase our customer
base, more particularly in the higher end segment, a separate SME Department
is functioning to drive MSME banking services across the Bank.
16.4 Accordingly, the various initiatives that have been taken up by the Bank
towards realization of its objective are:
16.5 Under these initiatives, the Bank will continue to give additional thrust to
financing MSME sector having recognized long back that the sector is crucial to
the growth and development of the Indian economy. The industrial policy
initiatives taken by the Government and RBI over a period of time have had a
favorable impact on the process of growth of MSMEs sector in terms of
production, employment and exports. However, the process of liberalization,
while providing tremendous opportunities, has also thrown open numerous
challenges for the Indian small scale sector. For some MSME units, the process
opens up opportunities to expand and grow, while for others, the process is a
threat from abroad. The challenges to MSMEs sector from de-reservation, WTO
obligations, removal of QR restrictions, etc are a matter of concern to commercial
banks as well, as the banks too have substantial stake in the growth and
prospects of the sector. The Bank will endeavor to continue to support the
MSMEs sector in these uncertain times and achieve the benchmarks set by RBI in
regard to priority sector lendings. Bank has issued detailed circular guidelines on
finance of MSME units wherein the allocation of sub-limits to large corporate
borrowers for payment of dues to MSME units for supply of materials to
borrowing corporate is specified.
16.6 Banks lending to Medium Enterprises will not be included for the purpose of
reckoning under priority sector. As per RBI instructions, all advances granted to
units in the Khadi & Village Industries (KVI) sector, irrespective of their size of
operations, locations and amount of original investment in plant and machinery
will be covered under priority sector advances and will be eligible for
consideration under the sub-target (60%) of the small enterprises segment
within priority sector.
17.1 The Indian economy gets integrated with the global economic order, the
share of the services sector in the GDP and its contribution to future growth is
likely to outpace that of the industrial and primary sectors. Already, the services
sector accounts for approximately 50% of the GDP. The pattern of development
of this sector has been in line with that of other developed countries of the world
and it is possible that by the end of this decade, India may largely get
transformed into a services economy.
17.2 As per the World Trade Organization (WTO) services can be divided in 12
different sectors:
a) Communication
b) Business Services, including professional and computer
c) Educational
d) Environmental
e) Health
i) Transport
The inclusion of last item is a recognition on the part of WTO including that the
list cannot be exhaustive and new categories of services would emerge with the
pace of economic growth and modernization.
17.3 All the above service segments offer tremendous potential for the Bank
finance. Bank has been innovating new marketing and product strategies so as
to realize the potential offered by this sector. Recognizing the special nature of
the asset and liability profile, output etc. of such units, guidelines on lending to
various activities of services sector are in place. Liberalized norms in respect of
credit appraisal standards, collateral security, rigor of assessment are permitted.
The generally indicative norms, subject to suitable modifications for specific sub
segments within the service sector are:
i) The current ratio and TOL/TNW ratio (as per audited balance sheet not
older than 12 months) should be as per the indicative levels as given under:
Current ratio not below 1 is acceptable for units with FBWC limit of up to `5
cr.
18.1. GENERAL
18.1.1 With its predominant presence in the rural and semi urban areas, the
bank has been a pioneer in agricultural banking in the state of Karnataka. The
Agricultural Development Branches (ADBs) and Agriculture Banking Divisions
(ABDs) specialise in agricultural finance.
18.1.2 However, with the changing demographics and lifestyles in rural India, a
strong need for providing comprehensive financial services encompassing
savings, credit remittance, insurance and pension product to the rural populace,
has been felt by the Bank.
Agriculture:
18.1.3 The Credit Policy and procedures for agricultural segment are by and large
determined by RBI and NABARD and State Level Bankers Committee (SLBC). The
policies and procedures substantially differ from those of other segments.
Lending to this sector is characterized by the twin features of Service Area
Approach (SAA) and scale of finance.
18.1.4 SAA is now applicable only to Govt. sponsored schemes. The Bank will
leverage on this relaxation for new lending and also go for takeover of quality
assets from other Banks. The Bank has put in place separate guidelines for take
over of Agri. Advances.
18.1.5 The scale of finance for crop loans is worked out by the District Level
Technical committee (DLTC) for various crops grown locally. Such scale of finance
is uniformly adopted by all commercial banks. However, with a view to improve
the flow of credit to the agri borrowers and meet their credit requirements
adequately, DGMs (Module) in the Bank are empowered to approve realistic scale
of finance with the scale of finance approved by the Technical Committee as
the floor for various crops assessed by the Banks Technical officers.
18.1.7 The following loans and advances for agricultural and allied activities are
considered as priority sector advances:
Direct finance
Loan Policy 2014-15 78
Short Term Loans for raising crops (Crop Loans)
Medium and Long Term Loans for agricultural production and development
needs
Indirect Finance
18.1.8 The lending under indirect finance should not exceed one-fourth of the
agricultural subtarget of 18% i.e. 4.5% of net bank credit.
18.1.10 Bank has recognized that setting up high value / hi-tech agricultural
projects has been engaging the attention of entrepreneurs of late, and projects
covering agro/ food processing , biotechnology etc., are now being set up in the
country. With a view to respond to these emerging opportunities, the Bank
extends support in a planned way to these unfolding avenues. Further, Bank has
identified following thrust areas for short term business opportunities with low
incidence of NPAs:
The bank has lead bank responsibility in three districts in Karnataka. The annual
credit plans for these districts are prepared and launched at the beginning of a
financial year. The progress of various State sponsored poverty alleviation/
employment generation schemes is reviewed in DCC / DLRC meetings. The Bank
also has to achieve the allocated targets by substantial participation in the
Annual Credit Plans (ACP) in the remaining districts in Karnataka.
Of late, micro credit has evolved as an economic development approach for the
benefit of low-income individuals in society. The term refers to extension of
financial services to the low-income groups including those who are self-
employed. These services include savings, credit, skill upgradation, etc. In these
endeavors the bank has been supporting many NGOs who are active in this field,
especially in the formation and development of volunteer groups known as Self
Help Groups (SHGs). The bank is committed to timely and adequate credit to
SHGs engaged in the upliftment of low income groups. Further, to increase its
outreach to a large number of low income people, Bank is also financing Micro
Finance Institutions/ Non Government Organizations including NBFCs engaged in
micro finance activities, for on-lending to Self Help Groups and to individuals.
19.1 The Banks Personal Segment Advances aim at providing affordable loan
products for meeting credit needs of the Indian nationals, NRIs and Persons of
Indian origin, to people belonging to every economic strata, for fulfilling their
lawful aspirations in accordance with the Banks judgment of loan repayment
capacity and risk perception of the borrowers in line with RBI/Government
policies.
The Bank has introduced the. Loan Origination System (LoS) in the Bank and the
salient features are as under.
19.2 LoS is an effective tool which allows the Bank to bring the best in its loan
approval mechanism. It also compliments effectively in our existing retail lending
systems with minimum amount of rework and additional follow up with
customers which is crucial to satisfying the discerning customers.
LoS brings loan processing to a central processing unit scenario through a web
based module integrating the sourcing, field investigation and processing units.
It incorporates work flow based processing to cater to the multi-tier approval and
deviation processes of the Bank. The work flow model divides the data entry of a
customers application in to various sub stages till the application is pending for
final authorization. It enables the user to track down all the different stages of a
customers application at any given point of time.
19.4 Personal banking asset products encompass product lines like (i) Home
Loans (ii) Auto Loans (iii) Education Loans (iv) Personal Loans. The first three
product lines are for acquisition /financing of a specific product. The fourth
product line is general purpose or non-specific, including loans like flood loans.
Similarly, Education Loans, Reverse Mortgage Loan, Loan against Pension, etc
address the credit needs of different age groups of the population. However, the
Bank does not give loans for speculative purposes. The Bank aims at being a
leading player in Karnataka in Retail Loan market by adopting the following
strategies :
19.5 The loans and advances under personal segment have several distinct
features as compared to loans to other segments. Some of the distinct features
of lending to this segment are given below:
(ii) Purpose of Loan: Varies from scheme to scheme e.g. housing, car
loan etc., are meant for acquisition of assets whereas personal loans
are generally availed for consumption. Educational loans are
extended for pursuing studies in India and abroad. The Educational
loan scheme has been formulated as per IBA/ RBI guidelines. Housing
loans schemes would aim at facilitating achievement of objectives spelt
out in the National Housing and Habitat Policy of Government of India.
(vi) Nature of facility: The loans are made available by way of overdraft
demand loan or term loan (medium or long term). These could be clean
or secured, depending upon the scheme.
viii) Fixed Interest Rates: Fixed interest rates are a special feature
of P-segment Loans. Loans are granted on fixed interest rate basis up to
certain ceilings only i.e. Housing Laons up to `1 crore. Further, Housing
Loans on fixed interest rate basis are granted subject to a force majeure
clause authorizing the bank to change the rates suitably and
prospectively in case of any major volatility in interest rates. Housing
Loans on fixed interest rates are also subject to interest rate reset clause
in terms of which fixed rates may be reset at the end of every two years
on the basis of the then prevailing interest rate scenario. To withstand
competition in the market, scheme for sanctioning loans at fixed interest
rates can also made available to certain category of borrowers.
ix) Maturity of Advances: While the maturity of term loans should not
normally exceed 8 years, in respect of Housing Loans, the repayment
period is now permitted upto 30 years. In respect of Educational Loans,
the loan is normally repayable in 5 to 8 years after commencement of
Loan Policy 2014-15 83
repayment. As the repayment would commence after a moratorium
period, which generally covers course period plus 6 months or 1 year
after getting employment, whichever is earlier, the tenure of Education
Loans may also extend beyond 8 years. Further extension of tenure can
be permitted upto a maximum of 5 years if interest rates on the existing
loans go up and the EMIs are left unaltered.
xi) No prepayment penalty for all loan schemes under Personal Segment
advances.
xii) Security: This differs from scheme to scheme depending on the purpose of
the loan.
xiv) Asset quality: Bank will take appropriate initiatives within the scope of
regulatory guidelines for keeping asset quality at acceptable levels.
xv) Priority sector classification: As per RBI instructions from time to time.
xvi) Outsourcing: Some of the processes viz., Income verification etc., may be
outsourced (KYC compliance would not be outsourced as it is a core
banking function).
19.6 In view of the Banks thrust on lending to P segment and the expected
high rate of growth, the Bank would periodically undertake assessment of risk
concentration in P segment advances. The risk management parameters i.e.
Credit risk/Market risk/Operational risk in respect of lending to P-segment
Loan Policy 2014-15 84
borrowers will also be examined and reviewed annually by the P&SB Department
in consultation with the Risk Management Department.
19.7 In Retail Scoring proposals are given 10 grades from 1 to 10 and classified
into three categories i.e. (a) Clear sanction (b) may be considered after credit
enhancement or application to be referred to next higher authority and (c) Decline
20.1 Export Sector has been recognised as a thrust area considering its
importance and its contribution to the economy. Therefore, the sector is being
presently financed at lower rates, with flexibility in financing norms.
20.5 Since packing credit loans are concessional and specific and purpose
oriented advances it will be the responsibility of the bank to ensure proper end
use of amounts disbursed to the exporters. RBI has laid down norms for disbursal
of loan amounts, maintenance of accounts, follow up and monitoring and
liquidation of packing credit. As the advance is granted on concessionary rates
and on relaxed terms and conditions, it is obligatory on the part of the exporter
to comply with the terms and conditions of the advance. In case of any default,
the advance will attract commercial rate of interest ab initio.
20.7 RBI has been traditionally pursuing a policy to make available export credit
at reasonably low interest rate with a view to helping the exporters to be
competitive vis-a-vis their competitors. RBI have rationalised the interest rates
on export credit which are indicated by RBI periodically in their Monetary &
Credit Policy as ceiling rate in respect of all categories of export credit so that
interest rate charged by the banks can actually be lower than the prescribed
rate. Such ceiling rates will be linked to Base Rate of respective banks, as
applicable to other domestic borrowers. The measures will reduce the interest
costs for exporters besides improving quality of service by ensuring competition.
20.8 In accordance with RBI guidelines, Bank has introduced Exporters Gold card
Scheme (EGCS) for credit worthy borrowers with good track record. The EGCS is
on highly competitive terms with concessionary rate of interest, limits available
for a period of three years with annual reviews, additional 20 percent stand by
limit etc.
20.9 As far as deferred exports are concerned, RBI has allowed banks to charge
their normal term lending rate based on the credit rating of the borrower. In this
connection, deferred exports are those where the realization period exceeds 180
Loan Policy 2014-15 86
days, with certain exceptions. All deferred exports are subject to regulatory
guidelines contained in Project Export Manual (PEM) published by RBI.
20.10. Circular with regard to fast track clearance of export credit in terms of
paragraph (v) of Reserve Bank of Indias Master Circular on Rupee/Foreign
Currency Export Credit and Customer Service to Exporters dated July 1, 2014
that dealt, inter alia, with facilitation mechanism, time-frame for disposal of
export credit proposals, joint appraisal, intervening layers of approval, setting up
of credit committee, etc has been issued separately.
20.11 ECGC Cover: Bank has obtained whole turnover Guarantee for Export
Credit ECGC, with a view to safeguarding Banks as well as borrowers interest as
also to reap the benefit of Risk Weight related concession available to ECGC
guaranteed accounts.
In view of the higher CCF and consequent higher capital allocation, LoCs are to
be issued only to high rated borrowers (SB-7and above) and on a selective basis.
For the lower rated borrowers, if the LoC request is to be entertained, higher
cash margin has to be stipulated with a view to cushioning the impact of higher
risk weight. A minimum cash margin of 25% for Term loan (project finance)
related LoCs and 10% for working capital related LoCs for poorly rated borrowers
need to be ensured over and above the normal LC margin already held.
20.13 Forward Contracts: Authorized Dealer (AD) branches are permitted to allow
importers / exporters to hedge their foreign currency exposure by booking
forward contracts. Forward contracts can be booked on the basis of declaration
The financial environment has changed rapidly since 1991, with liberalization in
the areas of trade, industry, services and exchange control, deregulation of
interest rates, removal of entry barriers for new banks, widening and deepening
of financial markets, entry of mutual funds, FIs, FIIs and insurance companies.
Further, significant changes have come about in the way, Corporates
conceptualize business models and operating processes, to improve efficiency of
their inventory / receivables management procedures resulting in reduced
dependence on bank borrowings.
With the interest margins on funded exposures of top corporates coming under
pressure, the fee-based transactions provide the much needed alternative.
Hence, concerted efforts and continuous exploration of emerging opportunities
are made to increase income in fee-based business covering the areas of Trade
Finance and Forex. To capture the fee-based business, it is also considered
essential to continue the credit exposures especially the short term exposures
at very competitive rates. It is necessary to retain the relationship by leveraging
it to capture the funds flow of the corporates and the related business
opportunities, which feed the various business groups.
As the terms and conditions governing the advance may differ from customer to
customer depending upon its requirements, Banks policy permits customer
specific documentation specially drafted by the legal experts and duly vetted by
the Banks Law Officer (in Head Office).
Corporate Loans as a product has been in existence in the Bank since 1999. The
scheme is applicable to corporate customers if C&I (Mfg) and SME (SSI)
segments with borrower rating SB7 and higher. Scheme details and detailed
operative guidelines are in place.
3. Minimum Quantum As per our delegation of financial powers for ZOCC the
powers for sanction of clean and unsecured advance is:
4. Banking with us At least for the previous three years in case of existing
units.
7. Credit Rating Not below SB-10 for units in industries where outlook is
Positive or Moderately Positive and SB-8 for industries
where outlook is neutral.
10. Rate of interest Floating linked with SBMPLR but not below 1.25%
12. Deviations from the As deviation in rating comes under major deviation,
Loan Policy or approval for permitting deviation should be as per the
parameters authority structure laid down in the Loan Policy.
prescribed above However, any deviation in respect of other norms
prescribed herein needs approval by the authority one
step higher than the Sanctioning Authority for all the
loans falling within the discretion up to HOCC-I
2.4. CRE exposures to the extent secured by Commercial Real Estate would
attract a risk weight of 100 per cent. In cases where a part of the CRE exposure
is not covered by the security of commercial real estate, that part would attract a
risk weight for CRE exposure or as warranted by the external rating of the
borrower, whichever is higher.
2.5 CRE-RH segment will attract a lower risk weight of 75% and lower standard
asset provisioning of 0.75% as against 100% and 1.00%, respectively for the
CRE segment (Presently, the applicable instructions are contained in RMD
Circular No.18/2013-14 dated 24.03.2014)
The housing loans extended in cases where houses are rented out need to be
treated differently. As per Basel II Framework, loans secured by a single or small
number of condominium or cooperative residential housing units in a single
building or complex also fall within the scope of the residential mortgage
category and national supervisors may set limits on the maximum number of
housing units per exposure. Therefore, such loans need not necessarily be
classified as CRE Exposures. However, if the total number of such units is more
than two, the exposure for the third unit onwards may be treated as CRE
Exposure as the borrower may be renting these housing units and the rental
income would be the primary source of repayment.
Loan Policy 2014-15 95
3.Loans for integrated township projects
Where the CRE is part of a big project which has small non-CRE component, it
will be classified as CRE exposure since the primary source of repayment for
such exposures would be the sale proceeds of buildings meant for sale.
Bank finance for acquisition of land to private developers for setting up of SEZ is
not permissible as per extant instructions as stated in para 2.2 of the Annex to
this circular. Banks can finance cost of land development, which will be classified
as CRE for the reason that the source of repayment would be the lease rentals of
the developed plots / sheds.
The following, may however, be noted:
In cases where there are arrangements to insulate the lease rentals from
volatility in the Real Estate prices by way of lease agreements for periods
not shorter than that of the loan and there is no clause which allows
downward adjustment in the lease rentals, such cases need not be treated
as CRE from the time such conditions get fulfilled.
Branches should keep in mind the substance of the transaction rather than
the form. For example, it is possible that a SEZ may be developed by a
single company entirely or mainly for its own use. In such cases the
repayment will depend on the cash flows generated by the economic
activities of the units in the SEZ and the general cash flow of the company
rather than the level of real estate prices. It should not then be classified
as CRE.
In some cases exposure to real estate companies is not directly linked to the
creation or acquisition of CRE, but the repayment would come from the cash
flows generated by Commercial Real Estate. Such exposures illustratively could
be:
Corporate loans extended to these companies
Investments made in the equity/units/debt instruments of these
companies
Extension of guarantees on behalf of these companies
Derivatives transactions entered into with these companies.
1. Exposures to entrepreneurs for acquiring real estate for the purpose of their
carrying on business activities, which would be serviced out of the cash flows
generated by those business activities. The exposure could be secured by the
real estate where the activity is carried out, as would generally be the case, or
could even be unsecured.
a) Loans extended for construction of a cinema theatre, establishment of an
amusement park, hotels and hospitals, cold storages, warehouses, educational
institutions, running haircutting saloons and beauty parlors, restaurant,
gymnasium etc. to those entrepreneurs who themselves run these ventures
would fall in this category. Such loans would generally be secured by these
properties.
For instance, in the case of hotels and hospitals, the source of repayment in
normal course would be the cash flows generated by the services rendered by
the hotel and hospital. In the case of a hotel, the cash flows would be mainly
sensitive to the factors influencing the flow of tourism, not directly to the
fluctuations in the real estate prices. In the case of a hospital, the cash flows in
normal course would be sensitive to the quality of doctors and other diagnostic
services provided by the hospital. In these cases, the source of repayment might
also depend to some extent upon the real estate prices to the extent the
fluctuation in prices influence the room rents, but it will be a minor factor in
determining the overall cash flows. In these cases, however, the recovery in case
of default, if the exposure is secured by the Commercial Real Estate, would
depend upon the sale price of the hotel/hospital as well as upon the maintenance
and quality of equipment and furnishings.
The above principle will also be applicable in the cases where the developers /
owners of the real estate assets (hotels, hospitals, warehouses, etc.) lease out
the assets on revenue sharing or profit sharing arrangement and the repayment
of exposure depends upon the cash flows generated by the services rendered,
instead of fixed lease rentals.
b) Loans extended to entrepreneurs, for setting up industrial units will also fall in
this category. In such cases, the repayment would be made from the cash flows
generated by the industrial unit from sale of the material produced which would
Loan Policy 2014-15 97
mainly depend upon demand and supply factors. The recovery in case of default
may partly depend upon the sale of land and building if secured by these assets.
Thus, it may be seen that in these cases the real estate prices do not affect
repayment though recovery of the loan could partly be from sale of real estate.
2. Loans extended to a company for a specific purpose, not linked to a real estate
activity, which is engaged in mixed activities including real estate activity.
A company has two divisions. One division is engaged in real estate activity, and
other division is engaged in power production. An infrastructure loan, for setting
up of a power plant extended to such a company, to be repaid by the sale of
electricity would not be classified as CRE. The exposure may or may not be
secured by plant and machinery.
3. Loans extended against the security of future rent receivables
Bank has formulated the Rent Plus scheme, where the owners of existing real
estate such as shopping malls, office premises, etc. have been offered finance to
be repaid out of the rentals generated by these properties. Even though such
exposures do not result in funding/acquisition of commercial real estate, the
repayment might be sensitive to fall in real estate rentals and as such generally
such exposures should be classified as CRE.
However, if there are certain in built safety conditions which have the effect of
delinking the repayments from real estate price volatility like
i. the lease rental agreement between the lessor and lessee has a lock
in period which is not shorter than the tenor of loan
ii. there is no clause which allows a downward revision in the rentals
during the period covered by the loan
Branches classify such exposures as non CRE. Branches may, however, record a
reasoned note in all such cases.
4. Credit facilities provided to construction companies which work as contractors
The working capital facilities extended to construction companies working as
contractors, rather than builders, will not be treated as CRE exposures because
the repayment would depend upon the contractual payments received in
accordance with the progress in completion of work.
5. Financing of acquisition / renovation of self-owned office / company premises
Such exposures will not be treated as CRE exposures because the repayment will
come from company revenues.
6. Exposures towards acquisition of units / to industrial units in SEZs
(a) Exposures towards acquisition of units in SEZ were specifically included in
the definition of CRE in order to prevent speculative dealings in such units.
However, since there are restrictions on transfer of such units and require
Government permission, the speculative activity in sale and re-sale of units is
unlikely to be there. Therefore, such cases should be more like financing of
industrial units or the projects and if such is the case, these would not be treated
as CRE Exposures.
(b) The exposures to industrial units towards setting up of units or projects and
working capital requirement, etc. would not be treated as CRE Exposures.
Banks advances to those HFCs, which are mostly lending to individuals for
residential housing as per the norms fixed by National Housing Bank (NHB) and
also fulfill the eligibility criteria to draw refinance from NHB, would not be treated
as CRE Exposure.