ABC - A Basic on Credit (Charges, Policy,Sanction, Monitoring)

Why is credit important?

ABC A session on Basics of Credit

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Importance of Credit

Credit Management is one of the key functions of any bankLoans and advances constitute over 2/3rds of Banks assets

The Interest and fees from advances make up the biggest share of Banks income

The quality of Banks assets depends upon how efficiently credit is managed

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Client approaches you for credit What is the first question we need to ask internally?

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If these pictures represent loan proposals, what do they tell you?

What about this?

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Can we take this?

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Can we pick this one up?

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Can we do this?

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And this?

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Finally, What about this?

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If these pictures represent loan proposals, what do they tell you?

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You have decided that the request is doable .

What next?

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Principles of Credit

Why the facility? Check credit requirement

Who? Promoters, Constitution, Track record, KYC, Sourcing, Credentials, Ref Checks What for? Activity End Use

Where? Location, logistics, access

When? Implementation schedule Draw downs

How? Structuring, funding (5 W + 1 H)

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Processing RequirementsStatutory Compliance & Clearance Constitution related papers, licenses, approvals, tax asst. orders

Financials Past 3 years audited B/S, Future projections, Profitability estimates

Security Documentary evidence, Value, Quality, Appropriateness

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Credit Policy Guidelines

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Some important contents of the Policy are

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You decide to set up your Lemonade factoryWhat makes you an acceptable Borrower to Banks?

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Who is an acceptable borrower?Is the customer asking for a loan acceptable? This is decided based on Certain qualitative considerations and Satisfaction of minimum financial characteristics

Qualitative considerations

What not to do

Qualitative Considerations These are negatively defined Not to engage in name lending Applicant is a well known person. So we lend This is not acceptable Not to deal with clients of questionable integrity.Not to deal with the persons engaged in speculative activities.Not to lend to projects which are environmentally unfriendly.Not to lend to businesses listed under negative list of the bank.Not to encourage borrowers engaged in businesses under restricted list.Not to lend to willful defaulters appearing in RBI defaulters list.Not to lend to NPA clients of other banks.Not to lend to those who figure in RBI caution list, ECGC specific approval list, CIBIL etc. Note: Any deviations to the above to be considered by only ECCHere you can provide an example of traffic rules of road what to do and what not to do17

Can you think of a NEGATIVE LIST?NO !NO! Bankers cannot process these proposals.

Defence /Weapons procurements.Gambling and Gaming companies, including casinos, and lottery operations.Financing political activities or to chartable organizations.Projects with negative socio economic impact.Projects lead in to occupational/adverse environmental impact/health concerns.Projects which may have ecological impact.Chit fundsFor credit to companies for buy-back of their securitiesAdvances to agents/intermediaries as considerations for deposit mobilization.Production of ozone depleting materialsBullion merchants or lending against bullion.Ship breaking industry.Financing Banned Articles.Any activity, which is not permitted by RBI18

Can you think of a Restricted LIST?Yes, ButBankers need prior permission to process.

Purchase, Construction, Development or Renovation of Hotels, Resorts or Theme/Amusement Parks in the luxury segment.Start up business or businesses which are entirely dependent upon new/unproven technology or new products.Mining.Aquaculture other than fresh water pisci-culture/prawn farming.Co-operative Banks.

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REGULATORY RESTRICTIONS

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Credit Dispensation Process

Credit is dispensed through Branches

Approval process Basically through Single Signature (SS) approvals at the Branch levels,

Dual Signature (DS) approvals at the Business Unit (BU) level or

Jointly with Credit Risk Management (CRM) Regional / Executive / Board level Credit Committee

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Financial Characteristics

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TAKEOVER ACCOUNTSOnly good quality accounts should be taken over from other banks.Only 50% of the delegated sanctioning powers can be used for takeover of accounts Takeover guidelines should be strictly followed Any deviations should be permitted by appropriate authority.Takeover accounts should be monitored carefullyThese loans should be reviewed with more frequencyQuick Mortality

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Creating a legal relationship with the Borrower - Loan DocumentationDocumentation establishes a legal relationship between the lending banker and the borrower.Documentation helps to put down in writing the terms and conditions of loans, the securities offered and rights and liabilities of the partiesCheck points for good documentation:Execution or signing - Registration under law as required Payment of stamp duty - Safe custody / Preservation Witnessing or attestation - Enforceability (Limitation)

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Handle documents !!!!

Handling DocumentationDocumentation is handled by the Officer / back end operations

Each Business Unit (Say, Business Banking, ARB, Wholesale Bkg) has an Ops unit in case of new age banks.

Trade finance related operations are handled by the Trade Finance Unit (TFU) & Branches at some specified centers

Credit customers serviced by Branch by Operations Department.

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Making sure Securities are there for the Bank Creation of Charge Creation of charge on different assets / securities creates rights in favour of lending bank This will help get payment of loan out of the security charged

Nature of Security Types of Security Kind of Charge Relevant Law Immovable property Land & Building Mortgage Transfer Property Act Sec 58Actionable claims Book debts, FDR, NSC Life Insurance Policy Assignment Transfer of Property Act Sec 130Movable Property / Goods Plant & machinery, Stocks , Vehicle etc Pledge or Hypothecation or lien Indian Contracts Act Sec 172, SARFAESI Sec 2 - nSecurity Instruments Shares, Debentures, MF Units, Bonds Lien Indian Contracts Act (Sec 170 & 171)Personal GuaranteesPromoters & Third parties Personal Liability Indian Contracts Act (Sec 126)

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SECRET OF KEEPING ASSETS HEALTHY

CREDIT MONITORING AND FOLLOW-UPMonitoring enables Healthy Assets maintenance

Some of the standard techniques used are: - Ledger Page Supervision, - Unit Visits, Client Calls, - Study of stock/Book Debt - Excess advances register, Use of Discretionary powers - Credit Risk Rating - Other financial statements

Ownership of each account

Asset classification Monitoring migration: Value / Numbers

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Managing Working Capital Accounts Basics of monitoring OD

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Credit is all about Calculated risks managed not avoided

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THANK YOU

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