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COMMERCIAL BANKING FUNDS,
REGULATORY PROCESS &
PRIORITY SECTOR LENDING
A PRESENTATION
BYCA. R.C.AGARWAL
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POST NINETIES
New
Economicpolicy
1991
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Privatisation of Financial Institutions
IFCI to IFCI Ltd., IDBI to IDBI Ltd. &
to IDBI bank
ICICI to ICICI bank Number of private banks set up
Govt. holding in banks diluted by more
than 40%
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Reorganisation of
Institutional Structure
Setting up of universal banks
One stop banking PSB Boards to have share
holder representatives
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Development in commercial banking
Demand for refinance has shrunk from
banks
Focus on Non fund based finance Capital adequacy, asset classification &
provisioning norms and accounting
standards made applicable to DFIs andFIs
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Development in commercial banking
Financial services such as Merchant banking, Project counseling,
Portfolio management, Credit syndication, New issue management, Mergers and acquisitions,
Corporate advisory services, Debenture trusteeship, Sponsorship of mutual funds etc.
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Commercial Banks
Economic environment Statutory Liquidity Ratio (SLR) 38.5% , Cash Reserve
Ratio (CRR) 15% + 10% (incremental ratio) of netdemand & time liabilities (NDTL)
CRR now is 6% SLR is 24% Item / Week Ended 2007 2008 2009 2011
Sep. 7 Aug. 1 Sept. 5 July 26
Cash Reserve Ratio 7.00 8.75 9.00 6
Lower intt. on SLR and CRR Directed credit programmes to Priority sector Narsimham committee-I
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Growth of banking industry
Details 1951 19.7.69 1997 2011 Aug 26
No. of SCBs+Non-SCBs
(Exc.RRB) 92 85 101 171
RRB - - 196 86 Branches
(SCBs/Non-SCBs) 4,151 8,261 63,700 80,000
Deposits 919 5,540 5,07,533 55,09,100 Advances 727 3,813 2,82,702 40,44,862
Advance to priority Sec. 1 lakh 16 lakhs
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Growth of banking industry
1951 1969 1995 2007
No of A/c credit 11,00,000 2,79,00,000
No. of A/cs deposit 18,00,000 30,00,00,000
% of CD deposits 51 25 17
% of HSS deposits 16 25 22
% of fixed deposit 33 50 61
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Growth of banking industry
Type of banks 1969 1997 2011
Nationalised banks 14 19 19
SBI & Associates. 8 8 6 RRB 196 82
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Commercial Banks
Directed credit
Scope of priority sector expended by including financeto SIDC, SFC, refinance to RRB and for Foreign and
new private sector banks investment in SIDBI bonds Heavy increase in branches, unprecedented growth in
deposits and advances mainly priority sector
Impressive progress in achieving social objectives
Heavy fall in productivity and profitability
High cost/exp. due to branch expansion in RU/SU
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Commercial Banks
Interest rate structure Only intt. rate of HSS remained regulated
From 1997 Bank Rate (BR) linked to refinance
from RBI, penal intt. by RBI for shortfall inreserve
PLR system introduced
Base rate system introducede
Concessional ROI withdrawn from priority sectorexcluding Export & Agri. Concessional ROI toexport finance with interest subside from GOI
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Commercial Banks
Capital adequacy norms9% (capital to
risk weighted asset ratio)
Income recognition, Asset classification
and Provisioning norms
Introduced from 1992
Now NPA after 3 months Standard
sub standard
Doubtful
loss assets
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Commercial Banks
Transparency of financial statements
Formats changed- to disclose breakup ofprovisions and percentage of net NPA to net
advances etc.
Tax treatment to provisions
Only write off are tax deductible.
5% of income and 10% of average aggregateadvances of rural branches permitted as deductiblegeneral provision
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Commercial Banks
Board of Industrial Finance and Reconstruction (BIFR)
This has not been very successful experiment
Debt recovery tribunals-1993
8 recovery tribunals ONE appellate tribunal in Mumbai
Helped in the recovery of bad advances
Securitization Act
It has given extensive powers to banks to take possessionof assets and auction the same to recover the dues
Sale of NPA accounts in lots
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Commercial Banks
Regional rural banks
Sponsored by PSBs- 196 banksnow to RRBs 82
Branch licensing procedure - liberalized 1994
Foreign banks
Allowed to open branches on reciprocalarrangement
Permitted to invest upto 20%, within overall 40%investment, in private sector banks
They are exempt from target credit in agri. finance
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Commercial Banks
New private sector banks Since nineties new licenses started
A few banks e.g. Times bank, Global trust bank,
Punjab bank, Centurion bank of Punjab alreadyclosed / merged
Public issues of PSBs Most of the PSBs have come to capital market
minus Punjab & Sindh Bank
United Bank of India has been permitted to comewith IPO
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Commercial Banks
Supervisory authorityRBI Board of Financial supervision (RBI) has been
setup
Appointment of CMD/EDs and Boardmembers
Appointment Committee has been setup with RBIGovernor as chairman
Recruitment & creation of posts Public sector banks covered in autonomy criteria
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Commercial Banks
Narsimham CommitteeII - 1998
Appointed as a follow-up of 1992 recommendations and toexamine II generation reforms in terms of
action to be taken to strengthen the banking system streamlining procedures, upgrading technology and
HRD
structural changes in the system
Mutual Funds Bank subsidiaries sponsored
Many banks have started marketing the products
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Management of bank funds
Reserves prescribed by RBISLR
& CRR
Advances
Investments
Cash and Bank balances
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CAPITAL
Tier I capital is (a) paid up capital, statutoryreserves and other free reserves (b) capitalreserve minus equity in subsidiaries, intangible
assets and lossesTier II capital includes cumulative perpetual
preferential shares, revaluation reserve, generalprovisions, hybrid debt capital instruments
Tier III Capital i.e. permanent perpetualpreference shares
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CAPITAL
Maintain unimpaired min. capital equallent tothe prescribed rate in the aggregate of riskweighted assets and other exposer (CRAR)
Capital adequacy includes-capital funds, riskadjusted and off balance sheet items and capitaladequacy for subsidiaries
Risk adjusted assets=Risk weighted aggregatedfund based and non funded assets
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Exposer norms Follow prescribed exposer limits for credit in
relation to individual, group, industry, sector Exposer norms for investment in various
securities are determined by the RBI and theBoards of banksAdvance against shares/debentures
Against physical and demat shares Upto 10
lakhs and 20 lakhs respectivelyAgainst IPO at concessional rate upto 10
lakhs to individuals
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REGULATORY BODIES
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
RESERVE BANK OF INDIA
(RBI)1948
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RESERVE BANK OF INDIA1948
MAJOR FUNCTIONS
Monitors, regulates, controls banking and financial system
Maintains monetary stability,
Promote development of markets and systems
Ensure credit allocation according to national priorities
Regulates volume of money and credit
Bankers bank
Manages SLR/CRR
Determines liquidity control measures
Acts as lender of last resort
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ROLE OF RBI
Note issuing authority Sole right to issue currency notes/coins other than
one rupee notes/coins and coins of smaller
denominations One rupee notes/coins and coins of smaller
denomination are issued by the Central Governmentcirculation is done by RBI
Currency issued by RBI is legal tender all over India.Presently the RBI issues coins of Paise 50, Rs. 1, 2, 5& 10 and notes of Rs. 10, 20, 50, 100, 500, 1000
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ROLE OF RBI
Note issuing authority-cont Production of currency, distribution, exchange,
withdrawal & destruction of notes, improvement in
security features & technology up-gradation ofcurrency notes
Through Regional issue offices and Currency chestsof RBI / Banks / Govt, treasury
Issues currency against 100% security/backing ofcoins/bullion, foreign securities, rupee coins, Govt.of India securities etc.
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ROLE OF RBI
Government banker Banker to the central / state Govt.
Undertakes all banking services on their behalf & transfer offunds & management of public debt
No interest on Govt. deposits is payable and no charges arerecoverable for normal banking business of the Govt.
Manages special funds e.g. calamity fund etc., issues andmanages relief bonds, Govt. employees pension disbursal and
functions as Govt. treasury Govt. pays commission for issue and management of public
debt i.e. raising resources from market
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ROLE OF RBI
Government banker-cont
Ways & Means Advances (WAMAs), to the Govt., for 3months maturity to bridge temporary gaps between receipts& payments at the graduated scale of intt. rate based onduration
Normal/clean advances without collateral
Secured advances against Govt. securities
Discretionary special advances Overdraft facility to state Govt. in addition to WAMA for 7
days @ BR and 8th day onwards @ BR+3%
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ROLE OF RBI
Supervising authority
Regulates / supervises banking operations throughRBI Act and Banking Regulation Act
Issues branch/extension counters/off-site ATMlicenses
Prescribe min. paid-up capital, reserves, transfer to
reserve fund, cash reserves and other liquid assetsfor banks
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ROLE OF RBI
Supervising authority-cont
Inspects the working of banks
Conducts ad-hock investigation
Controls appointments of CMD/CEO of privatesector banks
Approves / forces amalgamation / reconstruction /
liquidation of banks Supervises through Board of Financial Supervision
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ROLE OF RBI
Exchange control authority Develops/regulates foreign exchange Markets within
framework of Foreign Exchange Management Act (FEMA)
Custodian of countrys foreign exchanger reserves-Approx.
$320 bl. Decides investment & utilization of these reserves
Foreign exch. dealing through Authorised dealers (AD)
Supervises/controls ADs, exporters/importers for currency
trade Controls foreign exchange forward markets to provide cover
for exchange risk to importers/exporters
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ROLE OF RBI-
Regulator of money & credit
Formulates credit policy for adequate flow
of bank credit
Maintains currency price stability Influences the cost of money and credit
Important tools of credit policy are:
OMOs, BR, Refinance, CRR, SLR, LAF &Repo Rates
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ROLE OF RBI-
Regulator of money & credit
Open Market Operations (OMOs) - sale & purchase ofsecurities of Central Govt. and treasury bills (T.bills).
To control the amount of credit & money supply
To make bank rate policy more effective
To maintain stability in Govt. security & T. bill market
To support Govt. borrowing Programme
The OMOs are conducted only in Central Govt.
securities RBI uses only switching operation (no purchases against
cash) i.e. sale of long term against short term securities
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ROLE OF RBI-
Regulator of money & credit
Bank rate (BR)6% Rate used by RBI to buy/rediscount bills of
exchange/other eligible CP Banks relate their lending rate with BR
increase/decrease From 1997 advances by RBI, refinance, penalties for
shortfall in reserves are linked with BR Refinance
To relieve liquidity shortage To direct credit to selective sectors Export and General refinance in use
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ROLE OF RBI-
Regulator of money & credit
Cash Reserve Ratio (CRR) 4.5%
Intt. equal to BR for reserves above 3%
Ensure safety and liquidity of bank deposits
Penalty, ineligibility to refinance and also graduated fall in intt. rate
of CRR on shortfalls Statutory Liquidity Ratio (SLR) 23%
To restrict the expansion of bank credit
To increase bank investment in Govt. securities
To ensure solvency of banks
It is the ratio of cash in hand (excl. CRR), bl. in CD A/cs withbanks & RBI, gold and unencumbered Govt., local bodies & Govt.guaranteed securities to total demand & time liabilities
Default results in restrictions/high cost on refinance
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ROLE OF RBI-
Regulator of money & credit
Liquidity Adjustment Facility (LAF)- 2000
Operates through Repo and Reverse repotransactions to create the liquidity and to absorbliquidity on daily basis
The maturity period of Repos is 1 to 14 days andmin. bid size is 5 crore
Repo rate is normally 3-4 days rate, call rate is
overnight rate thereby call rate remains normallyhigher than repo rate Discretionary liquidity (DL) and call rate impact each other
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ROLE OF RBI-
Regulator of money & credit
Liquidity Adjustment Facility (LAF)- 2000-cont.. Autonomous liquidity (AL) is the flows from regular banking
functions e.g. currency authority and banker to the Govt. andbanks
It is total of (i) incremental accommodation in Waysand Means Advance (WAMAs), (ii) net primarysubscription to T. bills, dated securities (iii) rupeecoins net of Govt. deposits with RBI and (iv) RBI
primary market subscription Does not include flows out of policy intervention in
market
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Money Market Primary dealers (PD), money market mutual funds
(MMMF) came up, deregulation of intt. rates,enlargement of participants have emerged
Call / notice market
Commercial bills market Treasury bills market- (T bills) Commercial paper market (CP) Certificate of deposits market (CD) Repo market Foreign exchange market
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Priority sector lending means
Sectors of economy which are to be given priority
In 1968 meeting of National Credit Council, GOIdecided that commercial banks to increase finance inthe sectors of
Agriculture
Small scale industries
Description of priority sector got formalized in 1972
Net Bank Credit (NBC)This is reported every fortnight to RBI and is used
for calculating % for Priority Sector lending
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Priority Sector includes broadly
Agriculture Small scale industries including setting up of industrial
estates Small road and water transport operators owning upto 10
vehicles Consumption loans under consumption credit scheme for
weaker section Loans to software industry upto max. 1 crore from banking
industry Small business with original cost of equipment used for
business max. upto 20 lakhs Retail trade with max. finance to retail traders upto 10 lakhs
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Priority Sector includes broadly
State sponsored organizations for SC / ST Educational loans to individuals
Loans to specified industries in food and agro processingsector having investment in plant and machinery upto 5
crore Investment by banks in venture capital funds registered
with SEBI
Micro credit provided directly or through
intermediaries e.g. Loans to self help groups
Loans to NGO for lending to self help groups
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Priority Sector includes broadly
Professional and self employed persons with borrowingsunto 10 lakhs including
Max. 2 lakhs for working capital Purchase of one motor vehicle within these limits
For doctors setting up practice in rural area the limits are 15and 3 lakhs respectively
Housing loans (both direct and indirect)
Loans upto 15 lakhs in all areas
Loans upto 1 lakh for repairs in Rural/semi-urbanareas Loans upto 2 lakh for repairs in urban areas
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PRIORITY SECTOR FINANCE
Definition, targets and sub targets for prioritysectors are being determined by RBI every yearand can be modified from time to time
RBI decides procedures of handling the loanapplications, recording of applications, timeschedule for disposal, collaterals, penalties for
delayed payment and rehabilitation of sick SSIunits etc.
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Small Scale Industries
Industrial units engaged in manufacturing,processing or preserving of goods as alsoancillary units and whose investment in
plant and machinery is of maximum 1crore or as may be specified from time totime
For items like hosiery, drugs, stationeryitems etc. the limit is 5 crore
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Tiny Enterprises
Unit having investment in
plant and machinery upto 25
lakhs
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Micro credit
Provision of thrift, credit and other
financial services and products of
very small amount to poor in rural /semi urban / urban areas to raise
their income levels
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Self help groups means
Registered or unregistered group of micro
entrepreneurs
Group of 10-20 members formed with anintention to save small amount regularly to
help each other in times of need
Only one person from a family can bemember of SHG
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Target for Domestic and Foreign banks
Category Domestic banks Foreign banks
Total PS advances 40% of NBC 32% of NBC
Total Agri. Adv. 18% of NBC No target
SSI Adv. No target 10% of NBC
Export credit Not treated PS 12% of NBC
Adv. to weaker sec10% of NBC No target
DRI Adv. 1% of Previous No target years total advances
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Direct agriculture finance
Advance directly to farmers for agriculture Crop loan Upto 5 lakh against pledge/hypothecation of agri. Produce
for max. 12 months
Direct agri. Finance should be 13.5% of NBC Medium and long term loans for
Purchase of machinery Land development
Construction of farm bldg. etc. Loans to plantations, fishery, poultry, bio-gas plant For purchase of land by small farmers etc.
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Indirect agriculture finance includes
Credit for distribution of fertilizers, pesticides, seedsetc.
Loans upto 40 lakhs for distribution of cattle feed,
poultry feed etc. Deposits held by banks in NABARD Rural
infrastructure development fund (RIDF)
Subscription to specified bonds of Rural ElectrificationCorp. and NABARD etc.
Loans for other specified activities from time to time
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Indirect finance to SSI
As specified
from
time to time
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PRIORITY SECTOR FINANCE
Type of investment treated as priority sector finance Specified bonds of SIDBI, NABARD, NHB, HUDCO
and institutions Facilities like Lines of credit, Bill discounting etc. to
SIDBI, SFC and other specified organizations In case of shortfall of target by a bank
Domestic commercial banks are allocated, afterannouncement in budget every year, contribution toRural Infrastructure Development Fund (RIDF) of
NABARD at the rate and for the period as declaredevery year
Foreign banks can deposit an amount equal to deficit inSIDBI bonds of 1 year @ 8%
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Weaker sections within priority sector
Small and marginal farmers with max. 5acres of land, landless labourers, tenantfarmers
Artisans, village and cottage industry with amax. Credit limit of 50000
SC and ST
Beneficiaries under DRI scheme
Self help groups etc
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Non-fund based Non fund based facilities are 100% substitute of fund based
facilities Contingent liability can become current liability if invoked These all are 100% risk weighted assets
Therefore, proper appraisal is necessary D.P. (Document against payment) L/C (Letter of credit) D.A. (Document against acceptance) L/C (Letter of credit) Guarantees
Performance Financial Advance payment Deferred payment (DPG)
M i bj ti f N f d
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Main objectives of Non-fund
facilities
To overcome shortage of funds
To increase profitability
To increase liquidityTo have easy monitoring
To facilitate international trade
To achieve optimum utilization of funds
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Precautions for financial guarantee
Lien on the goods received Proper treatment be given for assessing working
capital facilities
Ensure advance cash/goods received are usedfor production Ensure there are no onerous clauses Penalty for cost over run of project V/s
profitability of project Capability of firm to complete the work as per
terms
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Normal purpose to issue guarantees
Performance guarantee Supply contract
Bid bond Security deposit/Earnest money bond
PerformanceAdvance payment
Turnkey projects
Bid bond PerformanceAdvance payment Retention money guarantee Guarantee for raising funds in foreign countries
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Normal purpose to issue guarantees
Financial guarantee In lieu of excise duty payment For disputed custom duty For payment of sales tax
For payment of Income tax For payment of goods purchased on credit
Other guarantees
In favour of supplier of goods for undertaking job work In lieu of payment of excise duty on goods exported In lieu of custom duty on imported goods which are to be
ultimately exported Export performance
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RBI guidelines for guarantees
In case of following guaranteesnormally 100% cash margin to be taken
Guarantee issued to the court
Sales tax/Income tax guarantee
Guarantees for clearance of foreign cars
Guarantees to steamer companies /Railways for delivery of goods in absenceof bills of landing / railway receipt
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COMMERCIAL BANK
MANAGEMENT-CREDIT
APPRAISAL & MONITORING
A PRESENTATION
BYCA. R.C.AGARWAL
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Purpose of Credit Appraisal
It is major area of decision making for credit proposals
To know about the party
To ensure fair assessment of borrowers needs for credit
Appraisal is done pre-sanction and post sanction level It is scientific financial analysis of partys overall
operations
To identify exact purpose for which credit facilities arerequired
To decide the eligibility of credit
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Purpose of Monitoring
To ensure proper end-use of funds
To nullify the chances of diversion of funds
To have periodic review of progress and prospects of the
partys position To maintain control over the partys operations
To ensure implementation of banks terms and conditions
To pick-up signals on the health and status of partys
position
To take remedial measures
To take care of recovery, revival or rehabilitation
Important aspects of bank
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Important aspects of bank
lending Lending is an individual decision for lender/borrower
Main principles of lending
Priority / non-priority area
Safety / Security
Liquidity
Purpose
Profitability
National objective Spread / diversification of risk
Post sanction supervision and control
Important aspects of bank
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Important aspects of bank
lending Types of borrowers
Corporate / Non-corporate
Partnership / Proprietorship
Individual
Manufacturing
Traders
Small scale industry (SSI)
Small medium enterprise (SME) Priority Sector
Seasonal Industry like Tea, Cotton Sugar etc.
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Preliminary important matters
3 P
Party
Project
Profitability
3 C
Character of party
Capacity of party
Capital invested by party
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Preliminary important matters
To satisfy about
Policy
Business policy of party about business
Bank/Government/RBI Priority/Non priority
Marketability of product
Availability of raw material and infrastructure
Achievability of projectionsTurnover projections
Profit projections
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Preliminary important matters
Nature of Account
Prestigious group
Export oriented
Deposit oriented
Backward area
Ancillary business
Agro products or other priority sector area Small scale industry
Important points for appraisal
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Important points for appraisal
from Party Standing of party
Business experience
Directors / Partners worth and market standing
Capacity of management team
Position of industrial relations
Labour turnover
New account/ renewal / modification
Category of advance i.e. priority non-priority etc. Type of business
Details of branches of firm
Important points for appraisal
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Important points for appraisal
from Party Age of plant and machinery
Future plan for 3 to 5 years
Plans for modernization / expansion and source of finance
Why change of bank is desired in existing project/business Industrial group covered under MRTP Act 1969
Location of factory and branch from where facility to beavailed
Major shareholders Comments on credit report
Banking with the bank since when
Important points for appraisal
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Important points for appraisal
from Party Capital structure and means of capital
Borrowing powers
Search report about charge creation, titles of assets etc.
Details of facilities required
Facilities enjoyed with other Banks/Institutions
Financial ratios
Statutory liabilities / Contingent liabilities
Litigations Facilities enjoyed by Guarantors/Associate firms
Justification for working capital requirement
Important points for appraisal
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Important points for appraisal
from Party Restrictive covenants
About dividend
About management
About assets
About expansion of business
About unsecured loans and advances
Assessment of fund based and non-fund based facilities requirements
Experience with banks-covering nature and conduct of bank accounts
Tax assessment
Promoters contribution
Important points for appraisal
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Important points for appraisal
from Party Comparison of
Last projections with actuals
Reasons for variations
Growth of the company with similar company inmarket
Relationship with turnover to
SummationsAverage balance
Utilisation of funds / limits
Important aspects in credit
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Important aspects in credit
application Terms of agreement for sale and payment to be received
Of assets purchased
Of goods sold/purchased
Credit period permitted or received
Diversion of funds
To sister concerns
Investments in Capital / Commodity markets
Investments in real estate In other activities / projects of different line/same line
For long term purposes or vice versa
T
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Term Loans
Important information to be provided Techno-economic report
Details of land and buildings and plant and machinery
Technical competence and Manufacturing process Delivery schedule of plant and machinery and consumables
Means of finance
Security offered
Margin
Working capital arrangements
Time schedule for implementation of Project
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
T L
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Term Loans
Important information to be provided cont...
Cash flow / Debt coverage ratio / Amount of limit/ Repayment schedule
Pre-sanction inspectionApplications pending with other Financial
institutions/banks
Refinance Finance availed from other banks
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
C
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Care Current assets
Cash and deposits under lien for bank guarantees and L/Cs
Receivables
Inventories
Current liabilities
Deposits of out side parties
Unsecured deposits
Term loan installments payable within 1 year
IT provisions
D.A. L/C facility
Stocks of DA L/C
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
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I
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Important matters
Last 2 reviews to see projections were nearer to actuals
Capacity utilizationwill party be able to produce asprojected in available capacity
Quarterly information systemTo fix limits
Whether company is working within projected levels
Levels of inventory, receivables and consumablestores and sparesnorms for industry and pasttrends
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APPRAISAL
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APPRAISAL
Statement of accounts cont.
Whether Projected turnover is achievable?
Keep in mind Modernization / Expansion / Increase in orders
Export receivables
Reduce from CA before arriving at working capital eligibility
These receivable to financed fully without margin
Deposits from market Maturing / due in a year, to be taken as
current liability-not necessary to pay but due and even renewed To see that current liabilities are not projected less
To see that current assets are not projected more
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
D i l
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Danger signals
Account is running grossly out of order or always running nearthe drawing power
Payments are being made for purpose other than normalbusiness
Abnormal cash transactions
Heavy return of bills (more than 10%)
Payment of all bills on due date by drawees
Heavy sales without any reflection in partys account with bank
Party spending abnormally heavy amounts on luxury expenses,especially for personal use
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
D i l
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Danger signals
Very few transactions in partys account
Reduction in normal visits of party to bank branch
Party behaves abnormally like abnormal courtesy, abnormal non-cooperation
Abnormal thing noticed during inspection of account
Transfer of amounts outside the business of firm
Transactions through shroffs or money lenders
When there is undue delay or avoidance in submission ofBalance sheet and other papers for review of account
Default in payment of statutory dues
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
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T d itt 1975
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Tandon committee-1975
I method of lending
Total current assets (CA)
(-) Current liabilities excluding bank borrowings (CL)
= working capital gap (WCG)Less 25% of WCG or Net working capital (NW i.e.CA-CL) which ever is higher
= MPBF Minimum current ratio 1.17:1
T d itt 1975
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Tandon committee-1975
II method of lending Total current assets (CA)
(-) Current liabilities excluding bank borrowings (CL)
= Working capital gap (WCG)Less 25% of total current assets or
Net working capital (NW i.e. CA-CL) whichever ishigher
= MPBF Minimum current ratio 1.33 : 1
Ch r itt 1978
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Chore committee-1978
To use II method of Tandoncommittee for limits of 10 lakh andabove
Firm to submit monthly selectoperational data
Banks to fix operational limits on thebasis of QIS
Nayak and in house committee - 1993
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y
Turnover method
Working capital requirement is to be computedminimum 25% of projected turnover
80% of requirement to be given by banks and 20% byborrowers
Turnover method Assessment Projected annual turnover (PAT) i.e. gross sales
inclusive of excise duty should be realistic Reasonableness of PAT be satisfied from annual
statement of accountsAssess as per turnover method and as per traditional
system
In ho se committee October 1993
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In house committee-October 1993
Turnover method Assessment-cont
If traditional method calculation is more than thelimits to be permitted by turnover method than limit
to be permitted whichever is higher but DP to be onthe basis of value of stocks less margin and unpaidstocks
Level of trade credit should be in tune with past
practice. If it is more than projected trade creditallow at past level if justification is convincing
Freedom to determine MPBF
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Freedom to determine MPBF
As per RBI credit policy of April 1997, RBI withdrewthe prescriptions to calculate working capital limits asper Tandon committee
Banks to have their own system to assess working
capital credit needs within prudential guidelines andexposer norms prescribes by RBI Units engaged in export need not provide margin for
financing current assets represented by exportreceivables
Credit limits of units in Sugar industry to be determinedon basis of Current ratio of 1:1
Freedom to determine MPBF
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Freedom to determine MPBF
Sick/Weak units to be exempt from applicationof II method of lending
Additional credit needs of exporters coming out of firmorders of confirmed L/C, which were not taken in
account for fixing regular limits, to be provided in fulleven if sanction of such additional limits exceedsMPBF
Borrowing units marketing/trading 100% productmanufactured by village, tiny and SSI units will besubjected to I method of MPBF provided such firmsettles dues of suppliers within 30 days from date ofsupply
Actions need prior approval of
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p pp
lending institution
Additional acquisition of fixed assets Expansion and modernization plans
Borrowings from outside sources
Investment in subsidiaries Dividend out of years earnings
Issuing guarantees on behalf of sister concern
Pre-payment of loans before due date to financial
institutions Disposal of assets
Willful defaulters
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Willful defaulters
The unit has defaulted in meeting itspayment/repayment obligations to lender even when ithas capacity to honour the said obligation OR
Unit has defaulted in meeting its payment/repayment
obligations to lender and has not utilized finance fromlender for purpose for which finance was granted buthas diverted the funds for other purposes OR
Unit has defaulted in meeting its payment/repaymentobligations to lender and has siphoned off the funds so
that the funds have not been utilized for the specificpurpose for which the finance was granted, nor thefunds are available with the unit in form of other assets
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Diversion of funds
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Diversion of funds
Shortfall in deployment of funds visa-a-visa theamounts disbursed/drawn and the difference not beingaccounted for
Siphoning of funds is construed to have occurred if anyfunds financed are utilized for purpose unrelated tooperations of the borrower, to the detriment of thefinancial health of the entity or of the lender. The
decision of lender in this respect should be base oncircumstances of the case.