CONTENTS9.8 Assessment of Working Capital requirements 296 9.8.1 Turnover Method 297 9.8.2 Micro,...

I-17

PAGEForeword I-3Recommended Reading I-7Bankers’ Handbook on Credit Management Syllabus I-9Chapter-heads I-15

MODULE A : INTRODUCTION & OVERVIEW OF CREDIT

CHAPTER 1PRINCIPLES OF LENDING

1.0 Objectives 51.1 Introduction 51.2 Principles of Sound Lending 7

1.2.1 Safety 71.2.2 Liquidity 81.2.3 Profitability 9

1.3 Purpose of Loan 101.4 Diversification of Risk 101.5 Let Us Sum Up 111.6 Key Words 111.7 Check Your Progress 111.8 Answers to Check Your Progress 12

CONTENTS

I-18

PAGE

CHAPTER 2CREDIT POLICY

2.0 Objectives 152.1 Introduction 152.2 Policy Framework 162.3 Contents of a Credit Policy 172.4 Priority 282.5 Role 282.6 MIS and Review 292.7 Conclusions 292.8 Let Us Sum Up 302.9 Check Your Progress 302.10 Answers to Check Your Progress 31

CHAPTER 3TYPES OF BORROWERS & TYPES OF CREDIT FACILITIES

3.0 Objectives 373.1 Introduction 373.2 Individual 383.3 Agent 423.4 Attorney 433.5 Joint Borrowers 443.6 Hindu Undivided Family (HUF) 443.7 Proprietary Firms 473.8 Partnership Firm 473.9 Limited Companies 503.10 Registration of Charges under the Companies Act 57

CONTENTS

I-19

PAGE3.10.1 Effect of Non-registration 58

3.11 Limited Liability Partnership (LLP) 593.11.1 Precautions while granting credit facilities

to LLPs61

3.12 Other entities 623.13 Types of Credit Facilities 623.14 Let Us Sum Up 713.15 Key Words 723.16 Check Your Progress 723.17 Answers to Check Your Progress 73

CHAPTER 4CREDIT DELIvERY

4.0 Objectives 774.1 Introduction 774.2 Type of facilities 774.3 Modes of Delivery 784.4 Credit Thrust 86

4.4.1 Credit Priorities 874.4.2 Tenure of Credit 87

4.5 Credit Acquisitions 884.5.1 Primary Acquisitions 884.5.2 Secondary acquisition 88

4.6 Statutory & Regulatory Restrictions 884.7 Let Us Sum Up 884.8 Key Words 894.9 Check Your Progress 894.10 Answers to Check Your Progress 90

CONTENTS

I-20

PAGE

CHAPTER 5CREDIT APPRAISAL

5.0 Objectives 955.1 Introduction 955.2 Credit Appraisal 955.3 Validation of the proposal 975.4 Cardinal Principles of Lending 1005.5 Creditworthiness of borrower 1005.6 Purpose of the loan 1035.7 Source of Repayment 1045.8 Cash Flow 1055.9 Collateral 1075.10 Let Us Sum Up 1085.11 Key Words 1085.12 Check Your Progress 1095.13 Answers to Check Your Progress 109

CHAPTER 6CREDIT RATING

6.0 Objectives 1216.1 Introduction 1216.2 What is Credit Rating? 1246.3 Objectives of Rating 1246.4 Internal & External Ratings 125

6.4.1 Major Factors for Scrutiny 1266.4.2 A simple Model Credit Rating 1266.4.3 Methodology of Simple Credit Rating 127

6.5 Let Us Sum Up 1316.6 Key Words 132

CONTENTS

I-21

PAGE6.7 Check Your Progress 1326.8 Answers to Check Your Progress 133

MODULE B : ANALYSIS OF FINANCIAL STATEMENTS

CHAPTER 7ANALYSIS OF FINANCIAL STATEMENTS

7.0 Objectives 1637.1 Balance Sheet 163

7.1.1 Definition 1747.1.2 Balance Sheet and Banker 1757.1.3 Classification of assets and liabilities for

analysis176

7.1.4 Classification of Current Assets & Current Liabilities

179

7.1.5 Balance sheet analysis 1847.2 Trading and Statement of Profit & Loss Account (SPL) 186

7.2.1 Sales 1867.2.2 Gross Profit and Net Profit 1877.2.3 Auditors Note 188

7.3 Ratio Analysis 1897.3.1 Classification of Ratios and their signifi-

cance190

7.4 Other important Ratios 2087.5 Some Important Ratios 2117.6 Ratio Interpretation 2147.7 Uses of Ratio Analysis 2167.8 Funds Flow Statements 217

7.8.1 Preparation of Funds Flow Statement 218

CONTENTS

I-22

PAGE7.8.2 Nature of sources and uses of funds 2207.8.3 Refining of the Funds Flow statement to

analyse net change in working capital221

7.8.4 Analyzing the Flow of Funds by use of the Profit & Loss Account

222

7.9 Cash Flow Statement 2237.9.1 Change in current assets 2257.9.2 Change in current liabilities 225

7.10 Fund flow and Cash flow Analysis 2267.10.1 Classification of Balance Sheet items 2267.10.2 Identification of ‘Flow’ of Funds 2277.10.3 Statement of Changes in Working Capital 227

7.11 Let Us Sum Up 2297.12 Key Words 2307.13 Check Your Progress 2307.14 Answers to Check Your Progress 231

CHAPTER 8PROJECT APPRAISAL/TERM LOAN APPRAISAL

8.0 Objectives 2358.1 Introduction 2358.2 Why Project Appraisal 2368.3 Aspects of Project Appraisal 236

8.3.1 Technical Appraisal 2378.3.2 Commercial/Market Appraisal 2428.3.3 Managerial Appraisal 2438.3.4 Financial Appraisal 2448.3.5 Environment Appraisal 245

8.4 Term Loan Appraisal 2458.4.1 Analysis of past working results in case of

existing concerns245

CONTENTS

I-23

PAGE8.4.2 Cost of project and means of finance 2468.4.3 Estimates of Cost of Production and Prof-

itability250

8.4.4 Debt Service Coverage Ratio (DSCR) 2518.4.5 Sensitivity Analysis 2528.4.6 Break Even Analysis 253

8.5 Capital Budgeting 2548.5.1 Pay Back Period Method 2558.5.2 Average Rate of Return 2578.5.3 Time Value of Money - Discounting Tech-

nique258

8.5.4 Net Present Value Method 2608.5.5 Internal Rate of Return 2638.5.6 Benefit-Cost Ratio (BCR) 2648.5.7 Data needed for computation of NPV &

IRR266


MODULE C : WORKING CAPITAL MANAGEMENT

CHAPTER 9WORKING CAPITAL ASSESSMENT

9.0 Objectives 2899.1 Introduction 2899.2 Working Capital 2909.3 Concept of working capital 291

CONTENTS

I-24

PAGE9.4 Working Capital Gap 2929.5 Components of Working Capital 2929.6 Source of Working Capital 2939.7 Operating/Working Cycle 293

9.7.1 Computation of storage/retention period 2949.7.2 Uses of Operating Cycle 296

9.8 Assessment of Working Capital requirements 2969.8.1 Turnover Method 2979.8.2 Micro, Small and Medium Enterprises

(MSME)298

9.8.3 Maximum Permissible Bank Finance Method

300

9.8.4 Cash Budget Method 3039.9 Working Capital Finance to Information Technology

and software industry308

9.10 Loan system for cash credits 3099.11 Financial Ratios 310

9.11.1 Debt Equity Ratio 3109.11.2 Current Ratio 311

9.12 Cash Flow Analysis 3129.13 Investment in subsidiary and sister concerns 3129.14 Commercial Paper 3139.15 Slip back in current ratio 3149.16 Bridge Loan facility by banks 3159.17 CMA Data 3169.18 Let Us Sum Up 3209.19 Key Words 3229.20 Check Your Progress 3229.21 Answers to Check Your progress 323

CONTENTS

I-25

PAGE

CHAPTER 10NON-FUND BASED-CREDIT FACILITIES

10.0 Objectives 37110.1 Introduction 37110.2 Non-Fund based Limits 372

10.2.1 Advantages for bank 37210.2.2 Advantages to borrowers 37310.2.3 Risks 373

10.3 Letters of Credit 37310.3.1 Types of Letters of Credit 37610.3.2 Credit Implications of Letters of Credit for

Bankers382

10.3.3 Usance Letter of Credit 38310.4 Risk associated with opening Imports LC 38410.5 Assessment of Letter of Credit Limit 38610.6 Buyer’s Credit 389

10.6.1 Benefits of Buyer’s Credit 38910.7 Supplier’s Credit 390

10.7.1 Benefits/Advantages 39010.8 Bills Purchase/Discounting under LC 39010.9 Bank Guarantees 394

10.9.1 Assessment of Guarantee Limit 39810.9.2 Security 40010.9.3 Period of expiry of Guarantee 40110.9.4 Period of claim under the guarantee 401

10.10 Co-acceptance facilities 40310.10.1 Co-acceptance of bills-RBI guidelines 40310.10.2 Co-acceptance of bills covering supply of

goods (RM)404

CONTENTS

I-26

PAGE10.10.3 Supply of machinery under deferred pay-

ment guarantee arrangement404


MODULE D : OTHER CREDITS

CHAPTER 11EXPORT FINANCE

11.0 Objectives 41511.1 Introduction 41511.2 Pre-shipment Finance 416

11.2.1 Pre-shipment Rupee Export Credit 41611.2.2 Pre-shipment Credit in Foreign Currency

(PCFC)425

11.3 Post-Shipment Rupee Export Finance 43011.3.1 Advances against Undrawn Balances on

Export Bills432

11.3.2 Advances against Retention Money 43211.3.3 Export on Consignment Basis 43511.3.4 Export of Goods for Exhibition and Sale 435

11.4 ECGC Whole Turnover Post-shipment Guarantee Scheme

436

11.5 Interest Rate on Rupee Export Credit 43611.5.1 ECNOS 43811.5.2 Interest on Post-shipment credit 43811.5.3 Interest on Post-shipment Credit adjusted

from rupee resources438

CONTENTS

I-27

PAGE11.5.4 Interest Equalisation Scheme on Pre and

Post-Shipment Rupee Export Credit439

11.6 Post-Shipment Export Finance in Foreign Currency 44211.6.1 Eligibility criteria 44311.6.2 Source of On-shore funds 44311.6.3 ECGC cover 44411.6.4 Refinance 44411.6.5 Interest rate structure on Export Credit in

Foreign Currency444

11.7 Customer Service & simplification of procedure 44411.7.1 Customer Service 44511.7.2 Gold Card Scheme for exporters 44511.7.3 Sanction of export credit proposals 44711.7.4 Crystallization of Export bills 448

11.8 Other Points 44811.9 Let Us Sum Up 45011.10 Key Words 45111.11 Check Your Progress 45211.12 Answers to Check Your Progress 453

CHAPTER 12PRIORITY SECTOR LENDING/GOvERN-MENT SPONSORED SCHEMES/NABARD SCHEMES

12.0 Objectives 46512.1 Introduction 46512.2 Categories of Priority Sector 466

12.2.1 Agriculture 46712.2.2 Farm Credit 46712.2.3 Agriculture infrastructure 469

CONTENTS

I-28

PAGE12.2.4 Ancillary activities 46912.2.5 Micro, Small and Medium Enterprises

(MSMEs)470

12.2.6 Manufacturing Enterprises 47112.2.7 Service Enterprises 47112.2.8 Factoring Transactions 47212.2.9 Khadi and Village Industries Sector (KVI) 47212.2.10 Other Finance to MSMEs 473

12.3 Export Credit 47312.4 Education 47412.5 Housing 47512.6 Social infrastructure 47612.7 Renewable Energy 47612.8 Others 47612.9 Government Sponsored Schemes 485

12.9.1 Deendayal Antyodaya Yojana-National Rural Livelihoods Mission (DAY-NRLM)

485

12.9.2 Deendayal Antyodaya Yojana-National Urban Livelihoods Mission (DAY-NULM)

490

12.9.3 Prime Minister’s Employment Generation Programme (PMEGP)

492

12.9.4 Self-Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)

494

12.9.5 Flow of Credit to SCs/STs 49612.10 National Bank For Agriculture & Rural Development

(NABARD) Schemes500

12.10.1 Agriclinic and Agribusiness Centres Scheme 50212.10.2 Solar Schemes 50412.10.3 Capital Subsidy Scheme for promoting Solar

Photovoltaic Water Pumping systems for Irrigation and other purposes

504

12.10.4 MNRE Lighting Scheme 2016 505

CONTENTS

I-29

PAGE12.10.5 Agricultural Marketing Infrastructure 50512.10.6 National Livestock Mission 50712.10.7 Non-Farm Sector 50712.10.8 Micro Credit Innovation 50812.10.9 Self Help Group - Bank Linkage Programme

(SHG-BLP)508

12.10.10 Financing of Joint Liability Groups (JLGs) 51012.10.11 NABARD Financial Services Ltd. (NAB-

FINS)510

12.10.12 Micro Enterprise Development Programme (MEDPs)

510

12.10.13 Livelihood and Enterprise Development Programmes (LEDPs)

511

12.10.14 Scheme for promotion of Women SHGs (WSHGs) in backward & LWE districts of India

511

12.10.15 Smooth transition of WSHGs promoted in NRLM intensive blocks to SRLMs

512

12.10.16 NABARD’s Initiative EShakti 51312.10.17 Kisan Credit Card (KCC) 51312.10.18 For Marginal Farmers 516


CHAPTER 13RETAIL LOANS

13.0 Objectives 53513.1 Introduction 53513.2 Characteristics of Retail Banking 535

CONTENTS

I-30

PAGE13.3 Advantages of Retail Banking 536

13.3.1 Disadvantages 53613.4 Retail Banking Products 53713.5 A Model Home Loan 54213.6 A Model Auto/Vehicle Loan 54613.7 A Model Personal Loan 54813.8 A Model Pensioner Loan Scheme 55013.9 A Model Property Loan 55313.10 A Model Holiday Loan Scheme 55713.11 A Model Gold Loan Scheme 55913.12 Education Loan (IBA) 56013.13 Reverse Mortgage Loan 56513.14 Reverse Mortgage Loan-enabled Annuity (RMLeA) 56913.15 Let Us Sum Up 57213.16 Key Words 57213.17 Check Your Progress 57313.18 Answers to Check Your Progress 574

MODULE E : MONITORING, SUPERVISION/ FOLLOW UP & MANAGEMENT OF IMPAIRED ASSETS

CHAPTER 14DOCUMENTATION

14.0 Objectives 58314.1 Introduction 58314.2 Meaning of Document 58314.3 Importance of documents 584

CONTENTS

I-31

PAGE14.4 Types of documents 58514.5 Requisites of documentation 58614.6 Selection of documents 58614.7 Stamping of documents 587

14.7.1 Mode of Using, Cancelling Stamps 58714.8 Time of Stamping Instruments 588

14.8.1 Documents for which Stamp Duty is same all over India

588

14.8.2 Stamp duty on a document containing several distinct matters

588

14.8.3 Documents executed in more than one State 58914.8.4 Consequence of a document not duly

stamped589

14.8.5 Remedy for a document not duly stamped 58914.9 Documents of which registration is compulsory 590

14.9.1 Time limit for registration of documents 59114.9.2 Effect of non-registration of documents

required to be registered under the Indian Registration Act

591

14.9.3 Registration of charge under the Companies Act, 2013

591

14.9.4 Procedure for filing particulars of charge 59214.9.5 Consequence of non-filing of charge Form

for Registration with R.O.C.593

14.9.6 Consequence of non-registration of charge of a Motor Vehicle with R.T.A.

593

14.10 Execution of a document - Meaning 593

14.10.1 Process of documentation 59314.10.2 Mode of execution by different types of

executants594

14.10.3 Execution of Guarantee 59614.11 Limitation of documents 597

CONTENTS

I-32

PAGE14.11.1 Law of Limitation to the Guarantor 59714.11.2 Extension of the period of limitation 59814.11.3 Exclusion of the Period of Limitation 59814.11.4 Signing of acknowledgement by borrower

on behalf of Guarantor599

14.11.5 Date of Unstamped Acknowledgement 59914.12 Enforcement of Documents 599

14.12.1 Death of Borrower 60014.12.2 Death of a Guarantor 600

14.13 Scrutiny of documents at the time of execution 60114.14 Let Us Sum Up 60214.15 Key Words 60314.16 Check Your progress 60314.17 Answers to Check Your Progress 604

CHAPTER 15TYPES OF CHARGES

15.0 Objectives 60715.1 Introduction 60715.2 Various Types of Charges 608

15.2.1 What is a charge and what is its purpose? 608

15.2.2 Features 60915.3 Types of security 60915.4 Modes of charge 610

15.4.1 Lien 61015.4.2 Negative Lien 61215.4.3 Set-off 61215.4.4 Assignment 61315.4.5 Pledge 61415.4.6 Hypothecation 616

CONTENTS

I-33

PAGE15.4.7 Precaution for Hypothecation 61715.4.8 Risk of Double Financing 61715.4.9 Mortgage 61715.4.10 Mode of charge 61915.4.11 Advantages of Equitable Mortgage 62015.4.12 Precaution in case of Equitable Mortgage 620


CHAPTER 16FOLLOW-UP, SUPERvISION & CREDIT MONITORING

16.0 Objectives 62716.1 Introduction 62716.2 Credit monitoring : Meaning 62816.3 Monitoring Goals 62916.4 Monitoring Process 63016.5 Monitoring Tools 63116.6. Other monitoring tools 63116.7 Supervision & Follow-up 63416.8 Let Us Sum Up 63516.9 Check Your Progress 63516.10 Answers to Check Your Progress 636

CHAPTER 17MANAGEMENT OF IMPAIRED ASSETS

17.0 Objectives 65517.1 Introduction 655

CONTENTS

I-34

PAGE17.2 NPAs and their management 656

17.2.1 Credit Monitoring 65717.2.2 NPA why and how 65917.2.3 NPA management policy 663

17.3 Definitions 66517.4 Causes of sickness 67017.5 Income Recognition 671

17.5.1 Income Recognition Policy 67117.5.2 Asset Classification 67217.5.3 Typical guidelines for classification of NPAs 67217.5.4 Consortium Arrangement 674

17.6 Projects under implementation (Classification of NPA) 67417.6.1 Project Loans 67417.6.2 Project Loans for infrastructure sector 67517.6.3 Project Loans for Non-Infrastructure Sec-

tor (other than Commercial Real Estate Exposures)

676

17.6.4 Project Loans for Commercial Real Estate 67717.6.5 Other Issues 67817.6.6 Income Recognition 67817.6.7 Take out Finance 67917.6.8 Post-shipment Supplier’s Credit 67917.6.9 Export Project Finance 67917.6.10 Advances under rehabilitation approved by

BIFR/TLI679

17.6.11 Credit Card Accounts 68017.7 Provisioning Norms for NPA 680

17.7.1 Provisioning Coverage Ratio (PCR) 68117.8 Options available to banks for Stressed Assets 682

17.8.1 Prudential Guidelines on Restructuring of Advances

682

CONTENTS

I-35

PAGE17.8.2 Eligibility criteria for restructuring of ad-

vances684

17.8.3 Asset classification norms - Restructured assets

685

17.8.4 Income recognition 68717.8.5 Provision for diminution in the fair value

of restructured advances687

17.8.6 Up-gradation of loan accounts classified as NPAs

687

17.8.7 Mahapatra Committee Recommendations 68817.8.8 Revised Prudential Guidelines on Restruc-

turing of Advances688

17.8.9 General Provision on Restructured Standard Accounts

690

17.8.10 Criteria for Up-gradation of Account Clas-sified as NPA on Restructuring

691

17.8.11 Risk-Weights 69217.9 Viability Period 692

17.9.1 Benchmarks on Viability Parameters 69217.9.2 Promoters’ Sacrifice 69317.9.3 Conversion of Debt into Equity/Preference

Shares693

17.10 Wilful Defaulter 69417.10.1 Penal Measures 69517.10.2 Mechanism for identification of Wilful

Defaulters696

17.10.3 Compromise 69717.11 Legal Action 69717.12 Lok Adalats 70517.13 Debt Recovery Tribunal 70617.14 Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002 (SARFAESI)

709

CONTENTS

I-36

PAGE17.15 Resolution of Stressed Assets - Revised Framework 714

17.15.1 Early identification and reporting of stress 71517.15.2 Reporting to Central Repository of Infor-

mation on Large Credits (CRILC)715

17.15.3 Joint Lenders’ Forum (JLF) 71617.15.4 Formation of Resolution Plan 71717.15.5 Implementation Conditions for RP 71717.15.6 Timeframe for large accounts to be referred

under IBC718

17.15.7 Supervisory Review 71917.15.8 Norms Applicable to Restructuring 71917.15.9 Additional Finance 72117.15.10 Income recognition norms 72117.15.11 Conversion of Principal into Debt/Equity

and Unpaid Interest into ‘Funded Inter-est Term Loan’ (FITL), Debt or Equity Instruments

722

17.15.12 Change in Ownership 72217.15.13 Non-applicability of the framework 723

17.16 Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)

723

17.16.1 Committees for Stressed MSMEs 72517.16.2 Committee for a Corrective Action Plan 72517.16.3 Corrective Action Plan by the Committee 727

17.17 Insolvency and Bankruptcy Code, 2016 73117.18 Let Us Sum Up 74117.19 Key Words 74217.20 Check Your Progress 74217.21 Answers to Check Your Progress 743

CONTENTS

I-37

PAGE

CHAPTER 18FAIR PRACTICES CODE ON LENDER’S LIABILITY

18.0 Objectives 74918.1 Introduction 74918.2 To whom applicable 75018.3 Practices to be adopted 750

18.3.1 Loan Processing 75018.3.2 Loan Assessment 75118.3.3 Loan Disbursement 75218.3.4 Loan Administration 753

18.4 Recall/Repayment of the Loan 75418.5 Grievance redressal Mechanism 75418.6 Conclusion 75418.7 Let us sum up 75518.8 Key Words 75518.9 Check your progress 75518.10 Answers to Check Your Progress 756APPENDIx A : ExPOSURE NORMS 757APPENDIx B : ExAMPLES & PROBLEMS 764APPENDIx C : GLOSSARY 786REFERENCES 799

CONTENTS

CONTENTS9.8 Assessment of Working Capital requirements 296 9.8.1 Turnover Method 297 9.8.2 Micro,...

Documents

Transcript of CONTENTS9.8 Assessment of Working Capital requirements 296 9.8.1 Turnover Method 297 9.8.2 Micro,...