Credit Awareness

Study Material on
संबंधी अध्ययन-सामग्री
Credit Awareness Prog for
Clerks
लऱपऩकों हे तु ऋण जागरूकोता
कोाययक्रम
IT 1583
STAFF TRAINING COLLEGE

BANGALORE
कोमयचारी प्रलिऺण महापिद्याऱय
बंगऱूर
INDEX
SL NO PARTICULARS PAGE NO
1 Lending - an overview 1
2 Time Norms for disposal of Loan applications 5
3 Guidelines on Credit Information Reports 8
4 Internal Credit Risk Rating 10
5 Guidelines on obtention of Financial Statements 13
6 Components of Financial Statements 14
7 Ratio Analysis 20
8 Working Capital - Methods of Assessment 25
9 Micro Small and Medium Enterprises MSMEs 30
10 Term Loan 37
11 Credit Monitoring 42
12 Non Fund Based limits 52
13 Fair Practices code 55

Lending - An overview
Overview :
Lending is one of the major activities of any bank. Over the years, the risks involved in lending
have gone up along with the stringent regulatory norms on Capital Adequacy, Income
Recognition and Asset classification. We need to have a comprehensive approach towards
appraisal of credit and Risk Management. The Credit Risk Management policy of the bank
covers the various aspects of the lending policy of the Bank and contains the guidelines on
identification, measurement, monitoring and control of credit risks.
Principles of lending:
The basic considerations for a Banker for lending will be on the following principles:
1. Safety of funds: It is important because the Banker has to safeguard the stake holders'
money.
2. Identification of the borrower: This includes character, integrity and Business acumen of
the borrower because bank has to be repaid with interest after serving the growth
purpose of the economy.
3. Purpose: Purpose should be clearly spelt out. Usually it will be the source of repayment
(for productive purposes and / or asset creation) or social and economic improvement
in standard of living / lifestyles; for takeover of Borrowal accounts.
4. Liquidity / Repayment: The money should come back as envisaged for effective re-
cycling of funds so the needs are met in time.
5. Security: Any asset to fall back on, if repayment is not forthcoming. Provides an
additional comfort / safety cushion in case of need.
6. Profitability: Bank has to incur expenses, make provisions; pay interest to depositors
and pay dividend to share holders. Bank has to earn a reasonable profit with a
comfortable margin (Interest spread) to meet all the above.
7. Risk Management: Policies are formulated by the Bank as to the extent and areas of
risk appetite.
8. National interest: The advance will be suitable only if it does not counter the national
interest.
Types of credit:
Loans and advances are generally classified into fund - Based and Non - Fund - Based
depending on disbursement of funds is involved or not. Fund - Based limits are further
classified into Working Capital Facilities and Term Loans.
I. Fund based credit:
a. Working Capital Facilities
i. Open Cash Credit (OCC)
CREDIT AWARENESS PROGRAMME FOR CLERKS 1

ii. Advances against Book Debts
iii. Produce Loan
iv. Overdraft
v. Simplified Open Cash Credit for traders and small Enterprises (SOCC)
vi. Packing Credit, Clean Packing Credit
vii. Canara Trade
viii. Bills Limits (SDB, BE, Supply Bills)
ix. Export Bills received for Discount / Negotiation - FDB / FBE

b. Term Loans
i. Short Term Loans - Repayable in a period less than 36 Months
ii. Medium Term Loans - Repayable in 36 Months and above upto 84 Months
iii. Long Term Loans - repayable in over 84 Months upto 120 Months
2. Non - Fund based Facilities

i. Letter of Credit
ii. Bank Guarantees
iii. Stand - by LC
iv. Buyer's Credit
v. Letter Of Commitment
vi. Solvency Certificates
vii. Capability Certificates

Preliminary investigation & Pre - sanction visit:
Before proceeding with the appraisal of a credit proposal, unit visit and preliminary investigation
are to be necessarily conducted by the branch officials and KYC compliance should be
ensured. If the party is having accounts with other banks, OPL from them has to be obtained.
For understanding the business of the party, their management and history, promoter's net
worth outside the business etc, a detailed preliminary interview of the promoter/s has to be
conducted before we take a view on the loan proposal.
Preliminary Interview:
Preliminary Interview with the promoter/s is one of the very important areas of credit appraisal,
as many information which may not be otherwise available in the loan application and in the
other related written documents can be obtained only through a personal interview of the
proposed borrower. It is pertinent to note that the enterprise of an entrepreneur can be gauged
effectively through a professional interview of the borrower. The interviewer has to ensure that
open ended intelligent questions are asked to the proposed borrower with an objective to get

maximum possible information about the party and his business.
Before we take a view on any loan proposal, we need to have comprehensive information about
the party, the purpose for which the loan is sought, the financial strengths & weaknesses of the
unit to be financed, the party's net worth outside the business etc .We also need to consider the
"four Hs" and "five Cs" to determine whether the applicant qualifies for a loan.
The four Hs are:
• How much money is needed by the party?
• How that money will be used?
• How long do they need it?
• How the money will be repaid?
These questions are referred to as the ' four Hs' in a loan interview.
The five Cs of credit appraisal are Character, Capacity, Capital, Conditions and Collateral.
Each of these items is to be prudently analysed before taking a view on whether to consider the
proposal or not.
• Character
In commercial lending, character refers to the client's willingness and determination to meet a loan
obligation. Business people of good character will make every effort to repay a loan and will work
openly and transparently with their banker if their business experiences financial difficulties.
• Capacity
Management's ability to generate enough excess cash to satisfy all obligations is defined as
Capacity. Capacity also refers to the ability to manage cash. Although a company may generate
sufficient excess cash to pay its debts, it may use it for other purposes, for example, purchasing
fixed assets rather than paying off debts.
• Capital
Capital refers to the funds available to operate a business, of which there are two primary
considerations: the amount of equity capital the owners have invested in the business and how
effectively the total capital, including creditor capital, is employed. Sufficient equity capital is
particularly important in new, closely held business entities, which often fail when the total amount
of equity and debt is too small to finance the company's operations.
• Conditions
Conditions are external variables, such as the state of the economy and the type of industry in
which the client's business is a part. For example, a carpet retailer will be adversely affected when
housing sector starts showing downward trend.
• Collateral
A borrower can pledge collateral to offset weaknesses in the other Cs. Collateral provides the
bank a secondary source of repayment if the primary source of repayment does not materialize. In

order to repay a loan, collateral must be liquidated or turned into cash. An attempt by the bank to
sell a company's assets (collateral) often leads the debtor to seek protection by filing for
bankruptcy or by raising legal objections.
Once a view is taken as to whether we may proceed with the processing of the proposal we may
ask the party to submit application form and all other related documents. (The application forms for
various credit facilities are given in Annexure I)
Obtention of CREDIT INFORMATION REPORT from CIBIL and Credit Risk Rating are pre -
sanction exercises which are to be done before proceeding with the appraisal. These are detailed
in chapters ahead.

TIME NORMS FOR DISPOSAL OF LOAN APPLICATIONS:
The various time norms for disposal of loan applications are as below
(For MSME loan applications, pl see next page):
Sl. Nature of credit Facilities MODIFIED GUIDELINES
No. Sanctions Sanctions at Sanctions at
at Branch Circle HO
1 Loans upto Rs.25000/- 15 Days NA NA
2 Kisan Credit Card -branch powers 15 Days NA NA
3 Other Priority Sector Advances
1. Loans / Advances upto Rs.25000/- 2 Weeks NA NA
2. Loans / Advances over Rs.25000- 30 Days 45 Days 8 - 9 Wks
4 i) Loans up to Rs.25000/- 2 weeks NA NA
ii) Loans beyond Rs.25000/- and up to 4 weeks 4 weeks 4 weeks
Rs.5 lakhs
iii) Loans over Rs.5 lakhs and upto Rs. 30 days 45 days 45 days
25 lakhs
iv) Loans over Rs.25 lakhs 30 days 45 days Max.8 wks
5 Export Credit
30 days 45 days 45 days
(i) Sanction of fresh / enhanced credit
(25 days) (25 days) (25 days)
limits
30 days 30 days 30 days
(ii) Renewal of existing credit Limits
(iii) Sanction of adhoc credit facilities
(Days in brackets indicate the 15 days 15 days 15 days
maximum time frame for sanction (7 days) (7 days) (7 days)
under Gold Card Scheme)
6 Advances under Sole Banking, Multiple

Banking Arrangement, Consortium and
other than the above [(1) to (4)] the credit
proposals shall be disposed off within the
time frame as stated
(i) Sanction of fresh/ enhanced credit 30 days 45 days 60 days

limits (30 days) (45 days) (45 days)
(ii) Renewal of existing credit limits 30 days 45 days 45 days

(iii) Sanction of adhoc credit facilities
(Days in brackets indicate the maximum 30 days 30 days 30 days
time frame for sanction of export credit (15 days) (15 days) (15 days)
limits)
hereunder: PROGRAMME FOR CLERKS

CREDIT AWARENESS 5
TIME NORMS FOR DISPOSAL OF LOAN APPLICATIONS OF MSME
(HO CIR 220/2013):
Sl. Nature of credit Facilities MODIFIED GUIDELINES

No. Enterprises Sanctions Sanctions at Sanctions at
at Branch Circle HO
1 Loans upto Rs.25000/- Micro & Small
2 wks NA NA
Ent.
Medium Ent 2 wks
2 Loans beyond Rs.25,000/- upto Micro & Small 2 wks 2 wks 2 wks
Rs.5 lakhs Ent.
Medium Ent 4 wks 4 wks 4 wks

3 Loans beyond Rs.5 lakhs upto Micro & Small 4 wks 4 wks 4 wks
Rs.25 lakhs Ent.
Medium Ent 30 days 45 days 45 days
4 Loans beyond Rs 25 lakhs Micro & Small 8 wks 8 wks

8 wks
Ent.
Medium Ent 30 days 45 days 8 wks
REJECTION OF CREDIT PROPOSALS:

a) Applications for credit facilities from SC/ST customers shall not be rejected at branch
level and such applications shall be referred to the next higher authority for their
decision/permission.
b) Whenever applications for MSME loans under Govt. Sponsored Schemes are rejected
by the Branch Manager himself/herself for valid reasons, a register is to be maintained
to this effect which shall be examined by the controlling authorities during their branch
visits.
c) Rejection of MSME proposals is subject to concurrence of the next higher authority.
d) MSME proposals once rejected by a higher authority shall be placed before such higher
authority even though the subsequent proposals say, for lesser amount falls within the
powers of a lower authority.
e) Rejection of export credit proposals shall be reported to C & MD, as per extant
guidelines.
f) Rejection of credit proposals by the branch level authorities shall be recorded in a

register maintained for this purpose, which shall be reviewed by the controlling
authorities visiting branches.
Web Based Credit Sanction Register for PRR 20A, C, D, and NB179
Bank has introduces web based Credit Sanction Register Package for PRR 20A, C, D and
NB179 to have run time information on sanctions. The system covers proposals relating to
General advances, Government sponsored schemes, Agriculture and Retail lending schemes.
The branches have to key-in only a few fields relating to the credit proposals which enable
Monitoring of sanctions, disbursements, rejections and un-availment on an ongoing basis.
Proposals are to be inwarded invariably in the Web package to effectively monitor the sanctions
/ disbursements / rejections / un-availment.

GUIDELINES ON CREDIT INFORMATION REPORTS
Obtaining CIR (Credit Information Report) from CIBIL shall be a pre-sanction exercise and is
not a substitute for verifying default borrower data under RBI's defaulter's list / Willful defaulter's
list / list of undesirable parties at branches or Specific Approval List (SAL) of ECGCI etc.
CIBIL has categorized the credit information under two groups.
*Consumer Accounts - Borrower accounts in the names of individuals
*Commercial Accounts - Borrower accounts other than that of individuals
The data on suit filed accounts in respect of willful defaulters of Rs 25 lacs and above and other
borrower accounts of Rs 1 Cr and above are available in the CIBIL website which can be
accessed freely.
Applicability
*In the case of commercial accounts, obtaining Credit Information Report shall be
manadatory.CIR shall be obtained in consortium accounts where we are leaders.
*The CIR shall be obtained at the time of processing credit proposals from existing clients of the
Bank as well as proposals received from new parties.
*In the case of consumer accounts, obtaining CIR shall be mandatory as under:
Priority Sector - All borrowal accounts with Credit Limit of Rs 2 lacs and above Others - Rs 1
lac and above
Exemptions:
*All individual accounts below Rs 1 lac under non priority advances *All individual accounts
below Rs 2 lacs under priority sector
*All borrowal accounts where salary of the borrower is credited to the account with the lending
branch
*CANARA pension *Educational loans
*Loans against our own deposits/approved securities
*Gold Loans
*Staff Loans
On receipt of an application for credit facility at the branch level, the concerned advances
section officials shall draw the CIR from CIBIL website before processing the proposal. If the
name/s of any proprietor, director/s, partner/s, etc of an applicant appears in the CIR, then the
branch / sanctioning authority, inter alia, shall examine the aspects affecting the credit quality,
before processing and appraising the proposal.
Procedure for drawing CIR :
1. User shall log in to the CIBIL website:http://www.cibil.com
CREDIT AWARENESS PROGRAMME FOR CLERS 8

2. On opening the site, window will appear for selecting the segment-
consumer/commercial
3. Select the segment and punch the details as under:
*name
*date of birth *address
*any of the following
PAN Number/Voter identity card number/Passport details/telephone number etc
*gender
*PIN Code
If the information displayed is as per the requirement, request can be made for generating the
report. To avoid duplication, the report generated as per the request may be saved in hard disk
before taking a print.
Obtaining OPL from existing banker:
In the case of new parties, if they are already having accounts with other banks, OPL from the
bank concerned has to be obtained before processing the proposal.
CREDIT AWARENESS PROGRAMME FOR CLERS 9

INTERNAL CREDIT RISK RATING
Bank has an appropriate Credit Risk Management and monitoring process. The risk rating of
borrowers is a pre sanction exercise as per Bank's policy. The measurement of risk is through
the credit risk rating and scoring models put in place by the Bank.
Risk rating framework is the foundation on which all the credit risk management systems are
built. Rating exercise at the time of appraising a proposal provides useful inputs to the appraiser
and ensures uniformity in credit selection procedures. Apart from it, it aids in
• Pricing the loan products
• Evolving exposure norms
• Carrying out portfolio-level analysis and assessing credit quality
• Post sanction surveillance, monitoring and internal MIS
• Assessing the aggregate risk profile of the Bank
• Measuring credit risk and estimating the provisioning requirements as also capital charge for
credit risk
• Determining the frequency of review/ renewal
Credit Risk Framework in our bank

The concept of risk rating was first introduced in our Bank in 2000 as a post sanction exercise
for exposures to manufacturing activity with limits of Rs 8 crore and above. The guidance note
of Reserve Bank of India on credit risk management issued in October 2002 prescribed that all
the exposures (credit & investment) should be risk rated at the pre-sanction stage. Besides, for
the Bank to move to Advanced Approaches suggested by Basel II, it is necessary that all the
exposures are risk rated and a history of ratings is built up. Risk rating of all borrowal accounts
through Internal Risk Rating Models is mandatory requirement for moving to adoption of
Internal Rating Based Approach under Basel II. The Bank has established a system to measure
Credit Risk of various borrower clients with greater reliability and satisfaction.
Presently the Bank is using the following modules to Risk rate different levels of exposure and
individual borrowers. Judgemental Rating Modules are used while rating individual exposures.
The Credit Risk Rating is conducted using any of the following 4 models as applicable:
a. Risk Assessment Model (RAM)
This model is applicable for the borrowal accounts with sanctioned limit of over Rs. 2 crore. The
software is uploaded in SERVER located in HO Bangalore. The software is developed by
CRISIL and customized to suit our Bank's requirement. Users in the circles are able to access
the model through intranet.
b. Manual Model
This is applicable for borrowal accounts with sanctioned limit of over Rs.20 lacs and not more
than Rs. 2 crores. The model essentially addresses Business risks, Management risks and
Financial risks. Value statements have been provided under each trait to facilitate the users to
uniformly give the scorings and grade will be allotted as under. The Manual model has

separate models for risk rating borrowers pursuing industrial and trading activity. A separate
model has been developed for new accounts i.e., those with less than 2 years dealings with
us.
General Guidelines for Rating under Manual Model
The grading system adopted in the Manual model is on a numeric scale. Lower the credit risk
lower is the calibration on the scale. The scale starts from Grade 'III' representing highest level
of safety and lowest level of credit risk and ends at Grade 'VIII' representing lowest level of
safety and highest level of credit risk.
The various risk grades, their definition and the qualifying overall scores are given below
Overall risk score Risk Grade description

(out of 150) Grade Degree of Risk Degree of safety
> 100 III Low Risk (LR 3) Good
> 85 & up to 100 IV Normal Risk Satisfactory
> 70 & up to 85 V Moderate risk Just adequate & needs close

monitoring
> 55 & up to 70 VI High Risk - HR 1 Inadequate & needs very
close watch & monitoring
> 40 & up to 55 VII High Risk - HR 2 Poor & needs very close
watch & monitoring
< 40 VIII High Risk - HR 3 Poor
To qualify for risk grades III & IV a borrower should secure a minimum score of 29 under
financial risk apart from fulfilling the requirements of overall risk score stipulated for the Grade.
If a borrower is not able to achieve the required score of 29 under Financial risks he should be
assigned a next higher risk grade than the risk grade he qualifies for, as per the overall risk
score upto grade V. However from risk grade V onwards even if minimum score of 29 is not
recorded under financial score the borrower should be awarded respective risk grade based
on the overall score secured by him.
c. Small Value Model
This model is applicable for borrowal accounts with sanctioned limit of Rs.2 lakhs and above
and upto Rs 20 lakhs For the purpose of using the model the limit sanctioned alone is the
criteria. However, loans under Retail lending schemes and Direct agricultural loans and loans to
individuals where financial statements are not available (other than CANARA TRADE, RETAIL
TRADE and DOCTORS' CHOICE and Indirect Agricultural loans as mentioned vide H.O.Cir
150/07 and other loans under Priority Sector) are not covered under this model.
To qualify for risk grades III & IV a borrower should secure a minimum score of 20 under
Financial risk apart from fulfilling the requirements of overall risk score stipulated for the Grade

(total marks in this model is 135 and the gradation is done similar to the manual model). If a
borrower is not able to achieve the required score of 20 under Financial risks he should be
assigned a next higher risk grade than the risk grade he qualifies for, as per the overall risk
score upto grade V. However from risk grade V onwards even if minimum score of 20 is not
recorded under financial score the borrower should be awarded respective risk grade based on
the overall score secured by him.
d. Portfolio Model
The borrowal accounts of aggregate limits below Rs. 2 lacs and borrowal accounts where
financial statements are not available are risk rated under portfolio model, duly grouping the
accounts as near homogenous pool based on category of borrowers and loan
schemes/segment. The model covers rating of borrowal accounts classified under Priority and
non priority segments. Exposure within Rs. 2 lakhs and Direct Agriculture Loans, Exposure to
individual under Retail Lending Schemes (other than Canara Trade) , Priority Sector Loans
(Other than Retail Trade, Doctor's Choice, Indirect Agriculture) and Non-Priority Loans where
Financial Statements are not available.
APPLICABILITY OF PORTFOLIO MODEL:
The following exposures are covered under the portfolio model.
• Loans / advances under Retail lending Schemes, educational loans, excluding loans under
'Canara trade' scheme.
• Loans to Individuals.
• All direct and indirect Agriculture. However in case of exposure to corporates, firms, co
operative societies, wherever the financial statements are prepared, the risk rating is to be
conducted as a pre sanction exercise in any of the model as applicable.
• Any other schematic loans under retail lending or priority sector.
• Staff loans. (Loans and Advances against bank deposits and specified collateral, life
insurance policies, NSCs, IVPs and KVPs.)
• Loans / advances against valuable securities such as bank deposits, NSCs, KVPs etc.
Risk rating is a pre-sanction exercise and has to be done based on the balance sheet submitted
by the party.

GUIDELINES FOR OBTAINING FINANCIAL STATEMENTS
Provisions regarding Audit of Financial Statements to be Submitted :

1. For credit limits upto Rs.20 lakhs (FB+NFB) audited financial statements need not be
insisted. However unaudited financial statements should be obtained.
2. For credit limits of over Rs.20 lakhs (FB+NFB), audited financial statements should be
obtained.
3. Where by virtue of existing statute / law in force, the audit of the accounts is
mandatory, like in case of companies & business enterprises with an annual turnover of Rs
100 lacs and above, if the annual gross receipts exceed Rs25 lakhs rupees in case of
professionals etc, audited financial statements, should be obtained irrespective of the
quantum of credit limit.
4. For borrowers under crop loan & other agriculture related loans to whom income tax
provisions are not applicable, ABS need not be obtained for loans up to Rs 100 lacs.
5. Wherever applicable, Form-3 CB and Form-3CD prescribed under IT Rules should be
obtained.
6. Certified copies of statements with declarations such as "as extracted from the books of
accounts maintained by the party" or "found to be in agreement with the books of accounts
maintained by the party" or "verified and certified" or "certified and found correct" and such
other declarations will not amount to audit of accounts.
7. If the financial statements submitted are more than 6 months old at the time of submission
of proposal for fresh limits/renewal, provisional financial statements of the latest date should
be submitted by the parties.
8. All financial statements are to be obtained in triplicate in the case of proposals falling under
the powers of Circle Office and above.
9. Penalty:
Penal interest of 2% on the outstanding liability shall be collected if the Audited financial
statement is not submitted before 31st October of every year (within 7 months from the date of
closing of its accounting year, if the accounting year of the borrower is other than the period
ending 31st March - HO CIR 159/2010) or within a fortnight from the date of Audit of financial
accounts of the company whichever is earlier. (Cir 231 / 2009)

COMPONENTS OF FINANCIAL STATEMENTS
Auditors Report: The auditors will audit the accounts of the business entity and give
comments on accounts and on balance sheet and profit and loss account and other documents
attached to the financial statements. They also report whether the books of accounts are in
agreement and whether there is any deviation from generally accepted accounting principles.
This will help the stake holders including bankers to assess the performance of the business
entity and analyze its strengths and weaknesses.
Director's Report / Chairman's statement: Director's report is a report submitted by the
directors of a company to its shareholders, apprising them of the performance of the company
under its direction during the year and during the interim period between the date of the balance
sheet and date of the annual report. It also discusses company's plans for expansion,
diversification or modernization, company's future prospects and plans for investments. It is a
synopsis of the company's activities.
Balance Sheet: Balance sheet reflects the financial position of a business at a given point of
time. Balance Sheet can either be depicted in horizontal form or vertical form. Vertical
form is widely used by companies in their annual reports.
Profit & Loss Account: This is also known as Operating Statement. Profit and Loss account
statement summarizes the transactions which together result in a profit (or loss) for a specific
period of time. This profit or loss is reflected in the Balance sheet as an increase or decrease in
the owner's equity. Like Balance Sheet, P & L account statement also can be depicted in
horizontal or vertical form. Vertical form of P & L account statement is widely used by
companies in their annual reports. In this statement all revenues are shown first and expenses
are accounted later.
Funds flow statement: The major difference between a funds flow statement and a Balance
Sheet is that the funds flow statement captures the movement of funds between two balance
sheets where as the Balance sheet merely represents a static picture of the sources and uses
of funds as on a particular date. Funds Flow statement explains the various sources from which
funds are/were generated /raised and the uses to which these funds are/were put to use. This
statement would enable one to see how the business financed its fixed assets, built up its
inventory, and discharged its liabilities, paid its dividends and taxes and so on
Items appearing in Balance Sheet:

Capital:
In case of proprietorship concern, capital contributed by the promoter will appear on the
liability side of the balance sheet.
In case of partnership firm, two types of capital i.e. fixed capital and capital under their current
account will appear on liability side of balance sheet. The capital appearing under their current
account is floating in nature.
In case of companies there are two types of share capital. One is equity Capital and the other
CREDIT AWARENESS PROGRAMME FOR CLEKRS 14

is preference capital. Equity Capital is the contribution of capital by the owners (share holders)
of the company. Equity capital carries no fixed rate of dividend, where as preference capital,
which is contributed by preference share holders, carries a fixed amount or rate of dividend.
The funds contributed by the share holders/owners constitute the capital of the enterprise.
In respect of a limited company, the structure of the capital is as follows:
• Authorized capital - authorized by share holders of the company within which the Board of
the Directors can issue shares to the prospective shareholders.
• Issued Capital - the capital issued by the Board of Directors to the prospective
shareholders.
• Subscribed Capital - the capital subscribed by the prospective shareholders.
• Paid up capital - the amount paid by the prospective shareholders towards capital.
Reserves & Surplus:
These are surplus which have been generated from the business activities and retained in the
business.
Reserves are classified into two types i.e. Revenue Reserves & Capital Reserves. Further
Revenue Reserves are nothing but accumulated retained earnings from the profits of normal
business operations. Revenue Reserves are held in several forms like General reserve,
investment allowance reserve, capital redemption reserve etc.
Capital Reserves arise out of gains which are not related to the business operations of the
company. Some examples of capital reserves are Fixed Asset Revaluation Reserve, Share
Premium Reserve etc.
It is important to note that the Revenue Reserves are available for distribution of profits; where
as the Capital Reserves are not available for distribution among the share holders.
Surplus is the balance in the P & L Account after effecting all the appropriations. Reserves,
Surplus along with equity are known as Share Holder's funds.
Secured Loans:
These are borrowings made by the company / firm by creating a specific charge on the assets
of the Company / firm. Some examples of the secured loans are Long Term borrowings from
Commercial Banks, State Financial Institutions etc.
Unsecured Loans:
Borrowings made by the company / firm for which no specific security is furnished. Examples
are Fixed Deposits, Loans from Promoters/Directors, Inter Corporate Deposits and unsecured
Loans from Banks etc.
Current Liabilities:
Any liability that is payable in the next 12 months from the date of Balance Sheet shall be
treated as Current Liability. Therefore the installments of Term loans which are due for payment
in the next 12 months shall also be classified as CL.

Some Examples of Current Liabilities are Advance Payments received from Customers,
outstanding expenses, Dividends, Unclaimed Dividends, Sundry Creditors for Goods, Sundry
Creditors for expenses etc
Generally Bank borrowings by way of Long Term Loans or Short Term Working Capital limits
are reported as Secured or Unsecured loans depending upon the charges created. However for
the purpose of analysis of financial statements, one has to classify them as Term Loans or
Current Liabilities according to the definition of CL.
Fixed Assets:
Fixed assets are meant for carrying on the business operation of the company. Fixed assets
are not meant for resale. Examples of fixed assets are Land, Buildings, and Plant & Machinery
etc.
Fixed assets are shown as gross block and net block. The difference between them is
depreciation. Capital works in Progress are fixed assets which are in the process of
creation/construction. E.g.: If a factory building is under construction, the amount spent on such
construction is shown as Capital works in Progress. Soon after completion of construction, the
same is reflected in Fixed assets.
Depreciation:
Depreciation is a charge on the fixed assets. employed in producing revenues. The reason
behind this is, assets other than land deteriorate with use and eventually wear out. Hence cost
of such assets are to be charged against revenues over a period of time
Different methods are used for depreciating assets. They are:
> Straight Line Method
> Written Down Value Method.
> Sum of Digits Method.
Most companies follow either of the first two methods. In India, Income Tax Act 1961
recognizes the WDV method for the purpose of tax exemptions. Companies have freedom to
decide on the method of depreciation.
Investments:
They are financial assets owned by the company. Investments are long term or short term.
Financial assets though short term are to be classified as Investments, but not as Current
assets.
Investments made by an enterprise which are generally not realizable within a span of 12
months are considered as non current assets. Similarly investments or acquisition of assets
which are not required for business whether short term, or long term are also called non current
assets eg. investment in shares, allied concerns etc.
Current Assets:
Any asset that is realizable in next 12 months shall be treated as Current Asset. These assets
get converted into cash during the operating cycle. They are held for a short time. Current

assets consist of Inventories, Cash/Bank Balances, Sundry Debtors, Loans / Advances,
Prepaid Expenses etc.
Inventories can be in the form of raw material, semi finished goods, finished goods and stores &
spares. They are reported in the balance sheet at lower of Cost or Market Price.
Sundry Debtors:
These are amounts owed by customers. Sundry Debtors are reported less of allowance for bad
debts.
Pre paid Expenses:
They are expenses incurred for which services are yet to be received.
Loans & Advances:
They are amounts advanced to staff/employees of the company, customers or deposits with
Government departments etc.
Miscellaneous Expenditure & Losses:
Miscellaneous expenditure such as preoperative expenses and preliminary expenses are
included under intangible assets. In case of companies same are to be adjusted against
Statement of P and L / Reserves and Surplus and not to be shown under asset side,.
Losses on account of operations, if viewed from accounting, are a decrease in owner's equity.
But Company Law requires that share capital cannot be reduced to off set the losses. This is to
protect the interests of the shareholders. Therefore, losses are shown under reserves and
surplus and net it off against other surplus. Otherwise, negative figure will continue under
reserve and surplus.
Profit & Loss Account:
This is also known as Operating Statement. Like Balance Sheet. Profit and Loss account
statement summarizes the transactions which together result in a profit (or loss) for a specific
period of time. This profit or loss is reflected in the Balance sheet as an increase or decrease in
owner's equity.
Technically, the P&L account statement assumes secondary importance in relation to a
Balance sheet. Nevertheless, the P&L account statement furnishes information indicating the
results of operations over a period of time which is highly crucial to decide about the
performance of an enterprise.
Any format of income statement or Profit & Loss Account should include the following:
> Net Sales
> Cost of Goods Sold.
> Gross Profit.
> Operating Expenses.
> Operating Profit.
> Other income & Other expenses
> Profit before T ax

> Tax
> Profit after Tax.
Net Sales:
Not all sales result in full payment. Discounts, allowances and returns are all deducted along
with excise duty from gross sales to arrive at the Net Sales
Cost of Goods Sold:
Cost of goods sold, is different for manufacturers, wholesalers, and retailers. A manufacturer
deals with three types of inventory; raw materials, work in process, and finished goods. To
calculate the cost of goods sold for a manufacturer, the first step is to determine all direct
manufacturing costs over the course of the year; materials costs, labour expense, factory
overhead, and taxes. The calculation for a manufacturer is:
1. Raw materials (including stores & other items used in the process of
2. manufacture)
Power & Fuel
3. Direct labour (factory wages & salaries)
4. Repairs & maintenance
5. Other Manufacturing Expenses
6. Depreciation
7. Add: Opening stocks in process
8. Deduct: Closing stocks in process
9. Equal to Cost of production
10. Add: Opening stock of finished goods
11. Deduct: Closing stock of finished goods
12. Equal to Cost of sales or cost of goods sold
A wholesaler or retailer buys products from one party and sells to another. The cost of goods
sold for a wholesaler or retailer is calculated as follows:
Opening stock of inventory
+ Purchases
- closing stock of inventory
= Cost of goods sold
Because a service company does not produce or sell a tangible product, there is no cost of
goods sold to calculate.
Gross Profit:
When the cost of goods sold is deducted from net sales, the resulting amount is the gross
profit, which is the amount of money available to cover all other operating expenses. Gross

profit usually reflects the type of industry in which the company operates.
Gross Margin Trends:
Deteriorating margins indicate purchasing difficulties, manufacturing inefficiencies, or inventory
accumulation. Acceptable gross margin levels vary among industries, so to assess the
sufficiency of margins, make a comparison with others in the particular market or industry.
Gross margin trends usually are best compared as percentage trends and not Rupee trends.
Operating Expense Analysis:
Operating expense represents costs not directly related to the production of goods and
services. Operating expenses include officer salaries, selling expenses, and general and
administrative expenses. Operating expenses are a reflection of management decisions,
because the owner has more control over operating expenses than cost of goods sold.
Operating income (loss) is calculated by subtracting total operating expenses from the gross
profit. An operating loss occurs if the total operating expenses exceed the gross profit.

RATIO ANALYSIS
A ratio is an expression of linear direct relationship between two indicators. Ratio may also be
expressed as an integer or as a percentage.
Financial ratios
Financial Ratios are used to compare the risk and return of a firm (or of different firms) over a
period of time and in order to enable bankers, creditors and equity investors to formulate proper
credit and investment decisions.
Purpose and use
Ratios present a profile of a firm, its economic characteristics, competitive approach, and its
unique operative, financial, and investment characteristics.
The ratios are classified into four categories - Liquidity ratios, Leverage or Solvency ratios,
Activity ratios and Profitability ratios
Liquidity ratios:- Current Ratio:
Current Assets
Current liabilities
The current ratio offers an approximate measure of a company's ability to pay its current
maturing obligations on time. Generally, the higher the current ratio, the greater the cushion a
company has for meeting its current obligations.
Net working capital
Current Assets - Current Liabilities = Net Working Capital
Although net working capital is not stated as a ratio, it is a measure of liquidity and will be
covered here. As the name suggests, net working capital is money readily available for a
business's use.
Quick ratio is obtained by comparing current assets excluding inventory with current
liability.
This gives a better picture of the firm's ability to liquidate its current liabilities from the current
assets excluding stock
Leverage /Solvency ratios
Leverage is a measure of degree of risk shouldered by the firm versus its financiers. The assets
are financed by TNW (Tangible Net worth= Capital +Reserves-Intangible Assets) of the firm and
financers. Higher the proportion of borrowed funds greater is the degree of risk to the financers.
Highly leveraged business is less equipped to deal with the business cycle fluctuations and are,
therefore, more prone to failure. In the absence of TNW as a source of funds, the firm may be
unable to sustain its operations during economic downturn unless it can procure additional debt
financing. Such a proposal certainly possesses more risk for the bank. And if the default triggers
it is the bank which loses more than the promoters.

1. Debt – Equity Ratio:
Long Term Debt
Tangible Net Worth
DER represents stake of promoter vis - a - vis long term lenders. Lender will decide the same
based on risk perception.
2. TOL: TNW
Total Liabilities
TNW
This is a measure of the share of assets belonging to financers and the assets belonging to a
business's owners. As liabilities grow in comparison to equity, so does the risk to financers.
Eventually, a point is reached where financers have greater risk than the owners of the business
– certainly an undesirable situation.
3. Debt Service Coverage Ratio (DSCR):
Profit after Tax + Depreciation + Interest on TL

--------------------------------------------------------------
Interest on TL + TL Installments
DSCR denotes the debt servicing capacity of the business and the cushion available thereof.
The debt service coverage ratio shows the proportion of a company's net profit and non-cash
expenses needed to pay the principal due on long-term debt in the coming year. This ratio is a
fairly reliable indicator of a company's future performance, provided profitability and noncash
expenses are expected to remain the same or move upwards.
Activity Ratios:
Turnover ratios or activity ratios or asset management ratios, measures how efficiently the
assets are employed by a firm. These ratios are based on the relationship between the level of
activity represented by sales, etc, and the levels of various assets. The important turnover
ratios are:
• Inventory turnover
• Receivables turnover
The efficiency with which the firm converts raw materials into work in process and work in
process into finished goods can be analyzed from the following:
Material consumed
Raw Material Turnover = -----------------------------------------------
Closing RM or Average RM
Cost of production
Work in progress Turnover = -----------------------------------------------
Closing WIP or Average WIP

Cost of sales
Finished goods Turnover = --------------------------------------------------
Closing FG or Average FG
The inventory turnover reflects the efficiency of inventory management. A high inventory
turnover is indicative of good inventory management. A low inventory turnover implies
excessive inventory levels than warranted by production and sales activities, or a slow moving
or obsolete inventory.
Net Sales
Accounts receivable turnover: ----------------------------------------------------------
Average accounts receivable
This ratio shows how many times accounts receivables (debtors) turn over during the year.
Higher is the accounts receivable turnover the greater the efficiency of credit management
Holding levels
The inventory holding levels measure the average length of time required to sell inventory. Its
usefulness lies in its comparison to past years or to similar companies. The credit analyst
should remember that the valuation of inventory may differ among companies, especially when
making comparisons.
Closing stock of RM
Raw material Holding = ............................................... x 365 or 12 months
RM consumed
Closing stock of stores & spares

Stores & Spares Holding = ......................................................... x 365 or 12
Stores & spares consumed
Closing stock of WIP

WIP Holding = .................................. x 365 or 12 months
Cost of production
Closing stock of FG
FG Holding = .................................... x 365 or 12 months
Cost of sales / COGS
Sundry debtors & receivables

Debtors Holding = ............................................... x 365 or 12 months
Net Sales
This ratio gives the average number of days / months it takes for a company to collect credit
sales made to its customers.

Sundry creditors for goods
Creditors Holding = ----------------------------------- x 365 or 12
Purchases
This ratio measures how quickly a company pays its trade creditors. Credit terms vary
considerably from industry to industry. A significant increase in this ratio over a period of time
may indicate a cash flow problem, or it may merely signify an easing of credit terms
Profitability ratios:
1. Gross profit Ratio, Operating Profit ratio, Net Profit Ratio
In the income statement, there are four levels of profits or profit margins - gross profit, operating
profit, pretax profit and net profit. The term "margin" can apply to the absolute number for a
given profit level and/or the number as a percentage of net sales/revenues. Profit margin
analysis uses the percentage calculation to provide a comprehensive measure of a company's
profitability on a historical basis (3-5 years) and in comparison to peer companies and industry
benchmarks.
Basically, it is the amount of profit (at the gross, operating, pretax or net income level)
generated by the company as a percentage of the sales generated. The objective of margin
analysis is to detect consistency or positive/negative trends in a company's earnings.
Gross Profit
Gross profit Margin = -------------------------------------
Net Sales (Revenue)
Operating Profit
Operating Profit Margin = ------------------------------------
Net Sales (Revenue)
Net Profit
Net Profit Margin = ----------------------------------
Net Sales (Revenue)
Operating Cycle or Working Capital Cycle:

The process involved in the utilisation of working capital is cyclic. The cycle starts from getting/
RM either on cash basis or on credit and ends with realization of sale proceeds and make
payment to creditors. In respect of trading concerns, operating cycle represents the period from
the time the goods and services are purchased and the same are sold and realised. In the case
of manufacturing concerns, it is the time involved in the purchasing of raw materials, converting
them into finished goods and the same are finally sold and proceeds are realised. The working
capital cycle is illustrated as follows:

25
Working Capital Gap
This represents excess of current assets over current liabilities excluding bank borrowings. A
part of the Current Assets are financed by Current Liabilities (other than bank borrowings). The
remaining portion of current assets which requires financing is called as working capital gap.
Banks do not grant advance to the full extent of working capital gap. It is a well established rule
that the borrower has to finance a part of working capital gap out of either capital or long term
sources.
Net Working Capital:
Net Working Capital is the net surplus of long term sources over long term uses. This also
represents excess of current assets over current liabilities (including bank finance). It indicates the
margin or long term sources provided by the borrower for financing a part of the current assets
1. General
Working capital is basically the investment in current assets like raw materials, stores, semi-
finished/finished goods, sundry debtors etc. The amount locked up in the operating cycle is
called the working capital. The quantum of working capital varies from activity to activity.
Broadly, the norms for working capital assessment are made based on:
(i) The quantum of finance required
(ii) Segment of the borrower
(iii) Prevailing mandatory instructions of RBI,
(iv) The trade and industry practices prevailing and other objective factors.
The assessment shall be based on:
a. A total study of the borrower's business operations
b. The processing and production cycle of the industry
Financial and managerial capability of the borrower and the various parameters relating to the
unit and the industry.

WORKING CAPITAL - METHODS OF ASSESSMENT
Liquidity & Current ratio norms
Applicability
The guidelines on liquidity norms shall be applicable to borrowers provided with working capital
limits assessed under any of the three methods viz., Turnover method / MPBF system / Cash
Budget system.
(i) In respect of contractors undertaking construction contract and / or those who either
enjoy only NFB limits or predominantly NFB limits for the working capital purposes,
these norms may be relaxed by the respective sanctioning authority.
(ii) Term Loans and NFB limits for acquisition of fixed assets and for other purposes (other
than for working capital), are excluded from the current ratio norms as stated herein.
(iii) These norms are also not applicable in respect of working capital finance to schools /
colleges, hospitals and nursing homes, Hotels and restaurants, service providers,
infrastructure projects and plantation.
Norms and other related stipulation:
1. The benchmark current ratio is a minimum of 1.33 or 1.25 for borrowers whose working
capital limits are assessed under any of the accepted methods of assessment, except in
respect of finance to educational institutions, hospitals / nursing homes, service
providers, infrastructure projects and plantation, where the same may be fixed to each
borrower based on the specific nature of financing approved.
2. The benchmark current ratio is also not applicable to industries / activities for which
relaxations are provided by RBI. (E.g.: Sugar Industry)
3. Bank shall not encourage utilisation of working capital for purposes other than meeting
the requirement of the borrower's own business activity. Even within the business
activity, the Bank shall not, encourage diversion of short-term funds for long term uses
by the borrower.
4. Where prior permission is not obtained for the investment of surplus funds, branches
shall collect the full details of the related investments and study the impact thereof on
the financials / working capital management of the concern and report the same to the
sanctioning authority.
5. In respect of existing borrowers where CR is lower than the benchmarks the same has to
be monitored closely. In exceptional circumstances, if CR is less than 1, the guidelines
as prescribed by the Bank shall be adhered for sanction of credit proposals.
The current ratio norms for BIFR / SIC / Sick Small Enterprises (Manufacturing) / CDR
accounts and accounts under rehabilitation / restructuring shall be as per the rehabilitation /
restructuring package accepted/approved by the appropriate authority

Borrower's with LOWER CURRENT RATIO - (CURRENT RATIO LESS THAN 1)
The Credit proposals, among others, are subject to a thorough appraisal of financials and
hence in the normal prudence and as prescribed in the policy guidelines of the Bank; the
Current Ratio shall be not less than 1.25 to 1.33 depending on the quantum of loan and the
segment of financing. However, in exceptional circumstances, if CR is less than 1, the following
guidelines shall be adhered to for delegated powers to sanction.
Existing borrowal accounts:
If the accounts fall under the sanctioning powers of authorities up to Head of Circle, the
respective sanctioning authority can permit renewal / enhancement / additional limits.
However, additional exposure can be permitted subject to clearance from the next higher
authority prior to conveying the sanction. In case of accounts falling under the sanctioning
power of GM (H.O), ED / C&MD, the respective authorities can permit renewal / enhancement /
additional limits.
New borrower clients:
If the CR is less than 1, such proposals generally will not be entertained by the Bank and Head
of Circle and below authorities are not empowered to sanction credit facilities to such clients. In
exceptional circumstances, such proposals falling within the delegated powers of GM (C.O) can
be placed to GM (H.O) for decision.
Current Methods for Assessment of Working Capital
The assessment of working capital requirement of a borrower shall generally be made under
any one of the following 3 methods:
(i) Turnover method
(ii) MPBF System
(iii) Cash Budget System
Turnover Method
The genesis of the turnover method is traced to the P R Nayak Committee Recommendations
which were again reviewed by the Vaz Committee. Under this method, the working capital limit
shall be computed at 20% of the projected gross sales turnover accepted by the Bank.
In the case of MSMEs engaged in Manufacturing as well as rendering / providing services and
seeking / enjoying fund based working capital facilities upto Rs.500 lacs shall be assessed on
the basis of turnover method.
The turnover method shall be applied for sanction of fund based working capital limits to the
non MSME borrowers requiring working capital facilities upto Rs.200 lacs from the banking
system.
This system shall be made applicable to traders, merchants, exporters who are not having a
predetermined manufacturing/trading cycle.

Under the turnover method, maintenance of a minimum margin on the projected annual sales
turnover should be ensured. In other words, 25% of the projected / estimated gross sales
turnover value shall be computed as working capital requirement, of which, at least 4/5th
(20%) shall be provided by the Bank and the balance 1/5th (5%) shall be by way of promoter's
contribution towards margin money. If the available Net Working Capital is more than 5%, then
bank finance should be restricted to the balance amount within 25% of the projected / estimated
accepted gross sales turnover.
The working capital requirements are linked to projected turnover. Hence It should ensured that
the party has projected reasonably and branches should satisfy themselves about the level of
projection.
The projected turnover/output value is the 'gross sales' which will include excise duty also. In
the case of traders, while bank finance could be assessed at 20% of the projected turnover, the
actual drawals should be allowed on the basis of drawing power determined after deducting
unpaid stocks.
However, borrowers can opt for MPBF / Cash budget system and Bank can employ it if the
same is more suitable and appropriate for assessing their working capital needs. Actual
drawings will be based on drawing power computed as per Bank's guidelines
MPBF system
Under this method, the assessment of Working Capital Finance requirement is based on the
overall study of the borrower's business operation, the production / processing cycle of the
industry which shall result in estimation of a reasonable buildup of current assets supported by
Bank Finance. Here, proper classification of current assets and current liabilities shall be made
on the lines given in the CMA data format and Method II of MPBF (Maximum Permissible Bank
Finance) lending will be applied. A normal current ratio of 1.33 may be insisted subject to
specific deviations / relaxations.
Working Capital limits (Fund based) over Rs 2 Crore for non -MSME borrowers and over Rs 5
Crore for MSME borrowers as the case may be ,but upto Rs 25 Crore shall be assessed based
on the MPBF system. Limits over Rs 25 Crores can be assessed on the basis of MPBF system
or Cash Budget system at the option of the borrower.
Traders, Merchants, Exporters, others etc., requiring working capital limits (Fund based) over
Rs 2 Crores who are not having a pre-determined manufacturing / trading cycle, may opt for
Cash budget system if the same is more suitable and appropriate for assessing their Working
Capital needs.
Based on Kannan Committee recommendations, RBI has allowed freedom to the banks to
decide the holding levels of various components of current assets for financial support to
ensure efficient functioning of the unit.
The tolerance level of 10% is permissible on the assessed MPBF.

ARRIVING AT MPBF:
The following is the method of arriving at Maximum Permissible Bank Finance (MPBF) as per
Method II of lending:
TOTAL CURRENT ASSETS (CA)

LESS: TOTAL CURRENT LIABILITIES OTHER THAN BANK BORROWINGS
WORKING CAPITAL GAP
LESS: 25% OF CA OR ACTUAL / PROJECTED NWC WHICH EVER IS HIGHER
MAXIMUM PERMISSIBLE BANK FINANCE
(*) AFTER PROPER CLASSIFICATION
Cash Budget System:

The competitive banking environment calls for adopting methods of assessment appropriate to
meet the needs of borrowers. Under this method, the Working Capital needs of the borrowers
are assessed on the basis of projected cash flow and the estimate of cash deficit
In the case of borrowers enjoying / seeking Fund based credit facilities of over Rs.25 crores, the
same can be assessed on the basis of Cash Budget system or MPBF system, at the option of
the borrowers.
However, in the case of specific industries / seasonal activities such as software development,
construction activity, tea and sugar, normally, the system of assessment based on the cash
budget may be adopted. Further, in the case of specific industries like tea, wherever for valid
reasons, the borrower opts to avail the Working Capital facility under MPBF system, the same
may be acceded to.
The projected cash budget statement as per Appendix-2 and Projected Balance Sheet and
Profitability statement as per Appendix-3 as per Manual of Instruction on Working Capital
Finance shall be obtained in triplicate along with the application of the borrower and the MPBF
shall be fixed taking into account the peak level cash deficit.
Monitoring the cash budget through cash flow statement:
• The branches shall obtain the quarterly cash flow projections one month in advance before
the commencement of the quarter for stipulating the operative limit. The statement should
be obtained in triplicate.
• The branches shall obtain on a quarterly basis, the actuals of cash flow within a fortnight of
the completion of the quarter and scrutinise the variations with reference to the projected
cash flow obtained earlier, in the same format.
• A copy of the projected / actual cash flow statement shall be endorsed to the reviewing
authority at Circle Office with the specific comments / observations of the branch. In case of
HO power accounts, a copy of the cash flow statement along with the comments of the

branch should also be endorsed to the concerned processing Section at HO.
Apart from the above, the branches should also obtain half yearly balance sheet and funds
flow statement as per QOS/HOS from the borrower
DURATION OF WORKING CAPITAL LIMITS:
Normally, the duration of limits will not exceed 12 months from he date of sanction except in the
following cases:
Borrower Category Duration of limits that can be specifically permitted by the

respective sanctioning authority
Employees of the Bank 2 years
OD against Term Deposits
Upto the date of maturity of the Term Deposit
with our Bank
Exporters including those
Two years subject to the other specific operative guidelines
under Gold card category
H.O power accounts/Circle
power accounts rated as
below :
- Low risk - Grade I and 2 Maximum period of 18 months
- Low risk - Grade 3. Maximum period of 15 months
- Normal risk/ Moderate Maximum period of 12 months
risk/High Risk
LUCC 3 years
Canara trade 2 years
MSME In respect of MSME accounts (Industries and Services sectors)
which are categorized under LR1 and LR2 or rated as Low Risk
by SMERA or equivalent SME ratings from ECAIs approved
by RBI - Working Capital limits may be permitted for a period of
2 years. However, annual review of accounts to be conducted to
step up / step down the limits as is prevailing in the case of
Exporters under Gold Card Export scheme.
MSME - LR 3 - 15 months
KCCS - Canara Kisan OD 3 years
Kisan Suvidha 5 years
Krishi Mitra Card 3 years
GL OD 2 years

MICRO, SMALL AND MEDIUM ENTERPRISES (MSMEs)
DEFINITION
With the enactment of Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
on June 16, 2006 and notified on October 2, 2006, the definition of Micro, Small and Medium
enterprises has undergone change. With the enactment of MSMED Act 2006, Services sector
has become a part of Micro, Small and Medium Enterprises. Thus for the purpose of bank
credit, MSMEs would include both enterprises engaged in manufacturing or production and
providing or rendering of services.
A. Direct Finance:
1. Enterprises engaged in the manufacture or production, processing or preservation of
goods and whose investment in plant and machinery is the original cost excluding land
building and the items specified by the Ministry of MSME vide its notification no.
S.O.1722(E) dt 5.10.2006 as specified below:
2. Enterprises engaged in providing or rendering of services and whose investment in
equipment (original cost) excluding land building and further, fitting and other items not
directly related to the service rendered or as may be notified under the MSMED Act
2006) as specified below. These will include small road and water transport operators,
small business, retail trade, professional and self employed persons and all other
service enterprises).
Manufacturing Servicing
Enterprises : Enterprises :
 engaged in the manufacture or  engaged in providing or rendering of
production, processing or services and
preservation of goods and  whose investment in equipment
 whose investment in P&M is the (original cost excluding land &
original cost excluding land and building and further, fitting and other
building and the items specified by items not directly related to the service
the Ministry of MSME vide its rendered or as may be notified under
notification No. S.O.1722 (E) dated the MSMED Act, 2006) as specified
05.10.2006, as specified below: below:
 (These will include small road & water
transport operators, small business,
retail trade, professional & self
employed persons and all other service
enterprises).
Micro Investment in P&M does not exceed Investment in equipment does not
Rs. 25 lacs. exceed Rs. 10 lacs.
Small Investment in P&M is more than Investment in equipment is more than
Rs.25 lacs but does not exceed Rs.5 Rs. 10 lacs but does not exceed Rs. 2
crore. crore.

Medium Investment in P&M is more than Rs. 5 Investment in equipment is more than
crore but does not exceed Rs. 10 Rs. 2 crore but does not exceed Rs. 5
crore. crore
*Note: All advances granted to units in the Khadi and Village Industries Sector (KVI),
irrespective of their size of operations, location and amount of original investment in Plant &
Machinery / equipments will be covered under the priority sector advances and will be eligible
for consideration under the sub targets of the micro enterprise segment within the MSE ( Micro
and Small Enterprises ) sector to be considered as advances extended to Micro Enterprises
sector
B. Indirect Finance (Loans and advances provided to MSMEs through certain agencies
involved in promotion/development of MSME Sector):
Micro & Small Enterprises sector (Industry & Service)
i. Persons involved in assisting the decentralized sector in the supply of inputs to and
marketing of outputs of artisans, village and cottage industries.
ii. Advances to co-operatives of producers in the decentralized sector viz. artisans, village
and cottage industries.
iii. Loans granted by Banks to Micro Finance Institutions on or after April1,2011 for on-
lending to micro and small enterprises (manufacturing as well as services) are eligible
for priority sector status subject to compliance of guidelines specified in para 3.2 of HO
cir.241/2011.
Loans not eligible for classification as direct or indirect finance to MSE sector
a) Loans sanction by Banks to State Financial Corporations for on-lending to micro and
small enterprises
b) Loans sanctioned w.e.f April 1, 2011 to NBFCs (other than MFIs which adhere to the
criteria specified above) for on-lending.
Items to be included / excluded while calculating the Original Investment in Plant and
Machinery for determining an Industrial Unit as MSME (HO Cir.212/2011)
Included:
Wind Mills - The investment in establishing of windmill/s to generate electricity for captive
consumption or partly for captive consumption and remaining power to sell to Electricity Boards
/ others are to be included in the investment in plant and machinery for the purpose of
computation of investment limit for classification as Micro, Small and Medium Enterprises under
MSMED Act, 2006.
Excluded:
S.O.1722 (E) - In exercise of the powers conferred by sub-section (1) of section 7 of the Micro,
Small and Medium Enterprises Development Act, 2006 (27 of 2006) herein referred to as the
said Act, the Central Government hereby specifies the following items, the cost of which shall

be excluded while calculating the investment in plant and machinery in the case of the
enterprises mentioned in section 7(1) of the said Act, namely:
i) Equipment such as tools, jigs, dies, moulds and spare parts for maintenance and the
cost of consumable stores;

ii) Installation of plant and machinery;
iii) Research and development equipment and pollution control equipment;
iv) Bank charges and service charges paid to the National Small Industries Corporation
(NSIC) or the State Small Industries Corporation;
v) Procurement or installation of cables, wiring, bus bars, electrical control panels (not
mounted on individual machinery), oil circuit breakers or miniature circuit breakers
which are necessarily to be used for providing electrical power to the plant and
machinery or for safety measures;
vi) Gas producer plants;
vii) Transportation charges (excluding sales-tax or value added tax and excise duty) for
indigenous machinery from the place of their manufacture to the site of the enterprise;
viii) Charges paid for technical know-how for erection of plant and machinery;
ix) Such storage tanks which store raw materials and finished products only and are not
linked with the manufacturing process; and
x) Fire fighting equipment.
While calculating the investment in plant and machinery referred to in A .1., above, the original
price thereof, irrespective of whether the plant and machinery are new or second hand, shall be
taken into account provided that in the case of imported machinery, the following shall be
included in calculating the value, namely;
i) Import duty (excluding miscellaneous expenses such as transportation from the port to
the site of the factory, demurrage paid at the port);
ii) Shipping charges;
iii) Customs clearance charges; and
iv) Sales tax or value added tax.

• Classification Of Finance To MSME Sector
Priority Sector Non Priority Sector

Loans/advances (both fund and non fund
Loans/advances (both fund and non fund
based) extended to Micro and Small based) extended to Medium Enterprises–
Enterprises(MSE) –manufacturing (direct both industry and service (direct and indirect
and indirect finance) finance)
Bank loans upto Rs.5 crore per unit to Bank loans above Rs.5 crore per unit to
micro and small enterprises engaged in micro and small enterprises engaged in
providing or rendering service and defined providing or rendering service and defined
in terms of investment on equipment under in terms of investment
MSMED Act 2006 (cir 208/2013)
Note:
 Advances to food and agro- based processing units with original investments in plant
and machinery upto Rs.10 crore are to be classified under advances to MSME and not
under Indirect Finance to Agriculture.
 Advances to storage units (warehouse, market yards, godowns, cold storages and
silos) which are registered as SSI/Micro or Small Enterprises have to be classified under
Advances to Micro/Small Enterprises. If the certificate to that effect is not available, the
same has to be classified under Indirect Finance to Agriculture. The above classifications
are subject to investment ceiling in plant, machinery and equipments.
Certain types of funds deployment eligible as Priority Sector advances:
a. Investments made by banks in securitized assets, representing loans to various
categories of priority, shall be eligible for classification under respective categories of
priority sector (direct or indirect) depending on the underlying assets, provided the
securitized assets are originated by bank and financial institutions and fulfill the RBI
guidelines on securitization. This would mean that the bank's investments in the above
categories of securitized assets shall be eligible for classification under the respective
categories of priority sector only if the securitized advances were eligible to be classified
as priority sector advances before their securitization.
b. Outright purchases of any loan asset eligible to be categorized under priority sector,
shall be eligible for classification under the respective categories of priority sector (direct
or indirect), provided the loans purchased are eligible to be categorized under priority
sector; the loans assets are purchased (after due diligence and at fair value) from banks
and financial institutions, without any recourse to the seller; and the eligible loan assets
are not disposed of, other than by way of repayment, within a period of 6 months from
the date of purchase.
c. Investments by banks in Inter Bank Participation Certificates (IBPCs), on a risk sharing
basis, shall be eligible for classification under respective categories of priority sector,

provided the underlying assets are eligible to be categorized under the respective
categories of priority sector and are held for at least 180 days from the date of
investment.
REPORTING
In all the relevant returns and statements, various segments of MSME advances to be properly
classified in terms of revised definitions as per Para (1) above and reported accordingly. The
Controlling Offices at CO have to ensure that the eligible accounts are classified under MSME
sector in terms of the definition at Para (1) through test- check/verification.
Bank is required to report the progress in financing MSME sector on a quarterly basis to RBI,
Mumbai and also apprise the Board of Directors without fail. As such, branches and offices are
advised to report the details correctly and promptly within the stipulated time in PSR-1 and
PSR-22.
In all the relevant returns and statements, various segments of MSME advances to be properly
classified in terms of revised definitions and reported accordingly in the revised version of Flash
Report ( PSR 1) duly incorporating the changes.
Bank is required to report the progress in financing MSME sector on a quarterly basis to RBI,
Mumbai and also apprise the Board of Directors without fail. As such, branches and offices are
advised to report the details correctly and promptly within the stipulated time in PSR-1 and
PSR-23.
SUB-TARGETS FOR MICRO ENTERPRISES WITHIN MICRO & SMALL ENTERPRISES

a. Advances to Small Enterprises sector will be reckoned in computing performance under the
overall priority sector target of 40% of Adjusted Net Bank Credit (ANBC) or credit equivalent
amount of Off-Balance Sheet Exposure, whichever is higher.
b. 40% of total advances to Small Enterprises sector should go to Micro (Industrial) Enterprises
having investment in plant and machinery up to Rs.10 lac and Micro (Service) enterprise
having investment in equipment up to Rs.4 lac (HO Cir 6/2013).
c. 20% of total advances to Small Enterprises sector should go to Micro (Industrial) Enterprises
having investment in plant and machinery above Rs. 10 lac and up to Rs.25 lac, and Micro
(Service) Enterprise having investment in equipment above Rs.4 lac and up to Rs.10 lac(HO
Cir 6/2013).
Classification of advances as MSME in CBS( cir 58/2012 dt 28.2.2012)
Branches to ensure proper classification of advances as MSME . MIS needs to be updated

through BAM 83 option (Flexcube- Retail) ”M” screen (Flexcube – Corporate) not only while
opening the accounts but also at the time of renewal of running limits, as well as at the time of
Negotiating/Discounting Bills/cheques etc.

Branches to ensure the following :
a. New MSME accounts have to be properly classified at the time of opening the account
based on the value of Investments made in P&M/Equipments as the case may be, as
defined in MSMED Act 2006.
b. The Bills purchased/discounted/negotiated in Flexcube Corporate are also to be properly
classified as above.
st
c. Branches are required to verify all MSME accounts once in a year (before 31 March) and
ensure correct classification. Wherever the value of Plant & Machinery /Equipments is
arrived taking into consideration the permissible reduction on a/c of dyes, moulds, other
installation expenses etc as per MSMED Act 2006(Page No:189-of HO Cir 212/2011) a
certificate to that effect has to be obtained from Chartered Accountant and kept with
papers, so as to produce the same before AFI when called for.
d. In respect of existing accounts, branches/Circles to ensure that all MSME accounts are
properly classified by verifying BAM 83 option and effect corrections wherever required.
e. Branches to watch MSME divergence reports on weekly basis and rectify the
discrepancies on an on-going basis.
f. Accounts which are in Sector code -Priority-others have to be reviewed and classified
appropriately.
Branches have to send confirmation for verification of classification of all MSME accounts to
st
Circle Office once in a year as detailed above (before 31 March). Circles to send a
th
consolidated confirmation to HO before 10 April every year.
DELAYED PAYMENT TO MICRO AND SMALL ENTERPRISES

The existing provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and
Ancillary Industrial Undertakings, have been strengthened and the Central Board of Direct
Taxes (CBDT) has notified instructions in this regard under Sec 22 & 23 of MSMED Act - 2006
which are as shown under:
i. The buyer to make payment on or before the date agreed on between him and the supplier
in writing or, in case of no agreement before the appointed day. Such agreement in writing
between seller and buyer shall not exceed more than 45 days.
ii. The buyer fails to make payment of the amount to the supplier, he shall be liable to pay
compound interest with monthly rests to the supplier on the amount from the appointed day
or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.
iii. For any goods supplied or services rendered by the supplier, the buyer shall be liable to
pay the interest as advised at (ii) above.
iv. In case of dispute with regard to any amount due, a reference shall be made to the Micro
and Small Enterprises Facilitation Council, constituted by the respective State Government.

Strategy for increasing flow of credit to MSME Sector :
The Bank adopts suitable strategy to achieve the desired goal of increasing credit flow to
MSME sector in tune with the Government/RBI guidelines / expectations. Among others,
the following are put in place:
Information on Bank's MSME policy, loan products/schemes to MSME sector, simplified
loan application forms are made available in Bank's Website
Facility is created for submission of online loan application by the MSME entrepreneurs.
Holding periodical meets of entrepreneurs involving representative bodies of MSME
sector for creating awareness amongst MSME entrepreneurs about various schemes.
Displaying posters containing details on our various schemes prominently in all our
branches.
As a customer facilitation measure, simplified loan applications shall be made available to
Micro & Small Enterprises.
Focused attention to MSME sector through Specialized SME branches
Opening of SME Sulabhs (SME Hubs) in Circles for centralized processing and speedy
disposal of MSME credit proposals falling beyond the delegated powers of branches.
Conduct of workshops/seminars in association with external credit risk rating agencies
creating awareness, advantages of risk rating among the Bank personnel and
entrepreneurs.
Effective marketing of the MSME loan products by utilizing the services of the marketing
team in Circles/SME Sulabhs.
Advising branches/offices to have good liaison with existing and reliable clients', larger
units for introducing new clients.
Good liaison with Cluster management bodies, Industry associations, term lending
institutions for securing leads of prospective clients.
Formulation of area/cluster specific schemes facilitating credit needs of MSMEs in
specified industrially potential areas/clusters.
Conduct of video conference periodically at HO with Circles/Sulabh Executives analyzing
their performance vis-a-vis targets and giving directions for improvement in credit flow.
Review of Bank's exposure to MSME sector (Circle wise, SME Branch wise) on weekly/
monthly intervals by MSME Wing, HO and concerned Circles/branches are advised
suitably to ensure the credit flow is increased.
(H.O. Circulars 147 / 2007, 201/2007, 275 /2007, 284/2007, 260/2008, 136/2009, 183/2009,
212/2011, 241/2011)

TERM LOANS
Term loan is a single transaction loan where the loan amount is disbursed either in lump sum
or in stages and the same is repaid in installments along with Interest. Unlike in an operative
account the facility of reinstating the limit to the extent of repayment is not available. This is
due to the fact that the loan is availed for a specific purpose/ project.
Term loan is defined as under:
(i) Short Term Loans _ Any loan repayable in a period less than 36 months
(ii) Medium Term Loans _ Any loan repayable in 36 months and above but upto and
inclusive of 84 months
(iii) Long Term Loans _ Loans repayable in beyond 84 months
Term Loan is given both for industrial and non-industrial borrowers i.e., both for activities
involved in manufacture/ processing/repairing and business / trading activities etc.
Term loan is normally extended for acquisition of Land, Building and machinery. Term loans
are also granted for purchase of vehicles and along with working capital finance as composite
loans
General guidelines for all medium and long term loans
1. Credit risk rating shall be done as a pre sanction exercise for new projects and
subsequently on an annual basis for project proposals for expansion / diversification of
existing facilities.
2. Credit risk rating of borrowers wherein the project is under implementation shall be based
on the Balance sheet of the entity and the status report on project based on Project
Implementation Progress Report (PIPR), Lenders' Independent Engineer (LIE) reports,
etc.
3. The DER / FACR / DSCR indicated under the benchmark parameters may be computed
taking into consideration the internal accruals from the existing activity, for the entity as a
whole, inclusive of accepted cash flows from prevailing activity.
Further for computation of FACR, the capitalized cost shall be reckoned.
4. The moratorium period shall be as per implementation schedule accepted at the time of
sanction and shall generally end with the commercial operation date. However, the period
shall not go beyond 6 months from the date of commercial operation date / project
completion date as envisaged at the time of financial closure. The date of completion of
project should be clearly spelt out at the time of financial closure of the project.
5. Technical feasibility and economic viability of the projects have to be established. In
addition, sensitivity analysis shall also be examined to study the vulnerability of the
project to withstand adverse changes in select variables.

Guidelines with regard to conduct of project appraisal:
All Medium and Long Term loan proposals (including DPG / co-acceptance facility) for
proposed projects including Infrastructure projects of Rs.100 lacs and above from new
borrowers and Rs.200 lacs and above from existing borrowers of the Bank, shall be
accompanied with Project Appraisal report prepared by any one of the following:
- Project Appraisal Group (PAG), HO
- Project Appraisal Cells (PAC) at Circle offices
- State / Public Financial Institutions (SFI / PFI)
- Public sector banks and Private sector banks like ICICI Bank and HDFC Bank Ltd.
Agricultural term loans of above Rs. 50 lacs are required to be appraised by Agricultural
Consultancy Services (ACS), HO. However, the sanctioning authority can waive the appraisal
by ACS, HO provided technical feasibility and economic viability of the proposal is otherwise
ensured.
In case of other proposals, the borrower will prepare project report which furnishes a complete
picture of the project right from the stage of establishing to the stage of marketing the produce.
In essence, it is a written document consisting of the following:
(1) Background of promoters, details on product choice, market survey profile industry etc.,
(2) Government consents such as licenses, permissions etc
An Illustrative list of items to be verified is as under:
• Industrial Licenses / SME Registration.
• Import Licence, if any, for import of P& M, RM etc.
• Approval from Local authorities like Village Panchayat, Municipality, Corporation etc.
• Clearance from Pollution Control Board.
(3) Availability of Infrastructure like location, Land, Road, Power, Water, Storage facilities,
Labour etc.,
(4) Details of input and its availability
(5) Information on technology
(6) Projections of finance, production, sales etc
(7) Details of cost of the project, means of finance, sources of margin
(8) Details of project schedule i.e. schedule for implementation of the project in stages,
gestation period etc

Important ratios:
Net Profit after Tax+ Depreciation + Interest on TL
Debt Service Coverage Ratio = ....................................................................................
Interest on Term Loan + Principal repayment instalment
Net Fixed Assets (i.e. after providing for depreciation)

Fixed Asset Coverage Ratio = ------------------------------------------------------------------------
Long Term Debts secured by fixed assets
Long term Debt
Debt Equity Ratio = ---------------------
Equity
Equity refers to Tangible net worth i.e. capital, reserves & surplus, P & L account and other
reserves minus intangible assets like goodwill, debit balance in P & L Account (Loss).
FINANCIAL/PROJECT BENCHMARK PARAMETERS (TERM LOAN)
i) Transport operators
In case of loans for acquiring and operating Heavy Commercial vehicles / Light Commercial
Vehicles, an independent appraisal shall be carried out and repayment capacity will be
established with reference to satisfactory DSCR. Financial viability from the net revenues
from the vehicles proposed to be financed can be established.
Parameters Benchmarks
DSCR Not less than 1.50
Debt/Equity ratio Not more than 3:1 and can be relaxed upto 4:1
Repayment Period: Not exceeding 6 years excluding moratorium period of maximum 3
months.
ii) Others
A) Project cost upto Rs 100 lakhs:

Parameters Benchmarks
Debt / Equity Ratio Not more than 3:1. In exceptional cases the sanctioning
authority may accept upto 4: 1 duly justifying the
reasons.
Promoter's contribution Minimum of 20% of project cost.
Fixed Assets Coverage Ratio Not less than 1.33
Repayment period Upto 7 years excluding moratorium, but not to exceed an
overall tenor of 10 years
Overall DSCR Not below 1.50

B) Project cost of above Rs.100 lakhs
Parameters Benchmark
Debt / Equity Ratio Not more than 2:1 In exceptional cases sanctioning
authorities not les than the Circle Head can accept upto
4:1 duly justifying the reasons
Promoter's contribution Minimum of 20% of project cost
Fixed Asset Coverage Ratio Not less than 1.33. In exceptional cases sanctioning
authorities not less than the Circle Head can accept upto
1.20 duly justifying the reasons
Repayment period Upto 7 years & in exceptional cases upto 10 years,
excluding moratorium, but not to exceed an overall tenor
of 12 years
Overall DSCR Not less than 1.50. In exceptional cases sanctioning
authorities not less than the Circle Head can accept upto
1.40 duly justifying the reasons.
Internal rate of return (post At least 4% above estimated weighted average cost of
tax) (Applicable to project funds
cost of Rs.25.00 crore &
above)
Project parameters for Agriculture loans - Direct and Indirect like Cold storage/ Rural
godowns / yards / Warehouses / Agro processing units/ Agri Clinics / Agriculture Business /
Customer service units:
Parameters Benchmark
Debt / Equity Ratio 3:1 upto 5.66:1 (Beyond 3 :1 only for TL upto Rs. 10
Lacs)
Promoter's contribution Minimum of 15 % of project cost
Fixed Asset Coverage Ratio Not less than 1.2
Repayment period 5-7 yrs excluding moratorium period for equipments

loans - upto 15 yrs for Long term loans like plantation
loans, Estate purchase loans, Investment loans, FARM
Development loans (TL with longer gestation period)
Debt Service Coverage Ratio Not less than 1.5
Internal rate of (post tax) (Applicable to 4% and above from estimated weighted average cost of
project cost of Rs.25.00 crore & above) funds in case of cold storage/ rural godown/ yards/
warehouses.

Documentation and legal enforceability
It should be ensured that:
 The documents are executed in the prescribed form of the Bank or else in the draft of the
document approved by the concerned Legal Section of respective Circle office or others
as per Bank's guidelines.
 The documents are properly stamped, if so required by law.
 The person/s executing the documents has the legal capacity/authority to do so.
 The documents are properly witnessed, if required under law.
 The documents are registered if required under law or specifically insisted upon.
 Scrutiny of loan documents is made by/through the Legal section of respective Circle
offices after execution of documents as per prevailing guidelines of the bank.
 In order to ensure that the documents used in collateralised transaction and guarantors
are binding on all parties and their continuing legal enforceability, Bank's system of vetting
of loan documents and submission of compliance certificates shall be strictly complied
with and proper record of legal views shall be maintained.
 It shall be ensured that the Bank's right to sue the defaulter / co-obligant for recovery of
Bank's funds does not become time barred. Proper record of limitation shall be maintained
and periodical acknowledgement of debt/balance certificates shall be obtained from the
counter party

CREDIT MONITORING
Objectives:
• Identify loans & advances, which develop signs of delinquency, in order to facilitate
initiating prompt remedial action and to prevent slippage of borrowal accounts to NPA.
• Ensure proper use of credit facility by the borrowers and adherence to loan covenants.
• Assess the degree of adherence to loan policies & procedures and to monitor compliance
with relevant policies & regulatory requirements.
• Provide management information reports on breach in covenants noticed, effectiveness of
credit review & monitoring to enable modifications in the process, if required, for enhancing
effectiveness.
Loan Review Mechanism
Scope of review:
Loan review mechanism is recognised as an effective tool for constantly evaluating the quality
of accounts in the Bank's credit portfolio and to bring about qualitative improvements in credit
administration.
The system and process in place monitors the quality of accounts in the credit portfolio of the
Bank on a continuous basis by evaluating end use, monitoring of events affecting credit risk and
detecting signs of any deterioration to initiate timely remedial measures so that the account
does not slip to Non Performing Asset status.
The process of loan review aims at overall improvement of the credit portfolio of the Bank by
detecting early warning signals and suggesting remedial measures, evaluating sanction
process and compliance, regulatory compliance, changes in credit risk etc.
Tools for review:
• Review of loan sanctions
• Mid Term Review
• Periodical monitoring through Credit Monitoring Format
• Special Watch List Statement
• Stock Audit Reports
• Internal Inspection Reports
• Quarterly working results/annual audit report, wherever applicable
• Project Implementation Progress Report (PIPR), Lenders Independent Engineer's Report
etc in respect of term loans/project loans
• Credit Audit Reports
Any other information available in the Office notes, correspondence available in the
Credit File

1. Review of Credit Sanctions made by each Sanctioning Authority
• Loan sanctions made by each sanctioning authority shall be placed before the next higher
authority, not below Scale IV, within the stipulated time frame
• Such sanctions include fresh sanctions, renewals and/or enhancements.
• The said higher authority shall review these sanctions with particular reference to the
below mentioned aspects:
- Exercise of credit sanctioning powers within the scheme of delegation of sanctioning
powers and other guidelines.
- Adherence to internal loan policies and procedures and applicable laws / regulations.
- Assessment of quality of the loan asset
- Precaution taken/ advised to safeguard the interest of the Bank
- Nature and adequacy of loan covenants
• The reviewing authority shall convey the observations/instructions if any, thereon to the
sanctioning authority for suitable action.
• In case of CO sanction accounts, the same should be reviewed by next higher authorities.
Loans/ advances sanctioned to employees of the Bank as per guidelines on 'Staff
Advances' and VSLs / Overdraft against the security of deposits with the Bank / NSCs /
KVP / Life Insurance Policies need not be reported for review by the next higher authority.
• Sanctions made by Head of Retail Hub/Head of CPU/SME Sulabh are to be reviewed by
the Head of Circle.
• Sanctions made by the officials other than head of hub, are to be reviewed by next higher
authority not below the rank of DM at the Hub/ CPU/ SME Sulabh.
• Sanctions made by Circle Head in a fortnight are to be reported in the structured reporting
format to Credit Review & Monitoring Section, HO within 7 days from the closure of the
relevant fortnight.
2. Mid Term Review (MTR)
This is also a post sanction review process applicable to loans and advances above a
specified cut off limit and for specified categories. The Mid Term Review shall essentially
focus on the following:
• Verification of adherence to loan policies and procedures of the Bank and applicable
laws/regulations.
Analysis of performance of the borrowal unit
• Identifying promptly any signs of weaknesses developing in the account and suggest
appropriate and timely corrective action.
• Use of the credit facility and conduct of account by the borrower.

• Compliance with the terms & conditions stipulated in the sanction.
• Overall credit quality changes.
• Issue guidelines/instructions wherever necessary to improve the asset quality.
Mid Term Review shall be based on the inputs in the format stipulated in this regard.
Coverage: All advances under the sanctioning powers of AGMs and above are reviewed under
this system with the following exclusions.
• All advances upto and including CM/DM power accounts as per delegation of Powers
Loans and advances to employees of the Bank.
• Exclusive single transaction limits (fund based or non fund based) sanctioned/ outstanding
for not more than one year, in cases where the borrower is not enjoying any other credit
limit/s.
• Non-fund based limits covered with full cash margin.
• Advances against deposits with the Bank.
• Advances to clearing & forwarding agents to whom only C & F and storage limits are
sanctioned.
• Loans under retail lending schemes of the Bank including Education loans.
• For the above category of advances, review of these accounts shall be done based on
various PR Returns and Special Watch List statements. In respect of advances to Sick
Industrial units as well as LPD accounts related prevailing guidelines should be followed.
Periodicity:
• The MTR shall fall due exactly 6 months from the date of sanction/ renewal.
• If the tenability is fixed beyond one year, MTR will be done every 6 months thereon.
• If the proposal for extension of the tenability is sought in the MTR format, subject proposals
shall be subjected to review before permitting extension. In such cases separate MTR as
per original programme is not required. Any sanction of additional limit / adhoc limit / STLs
in between 2 MTRs need not be programmed for a separate review and the same shall get
covered under the review programme drawn based on the original sanction/regular limit.
• In respect of TL / DPG / Co-acceptance limits, MTR is to be made at 6 monthly intervals
from the date of sanction.
Asset Sub-classification Code System (ASCC):
ASCC System is a mechanism to classify borrowers on the basis of compliance to the
parameters indicating the quality of assets and to detect early warning signals of incipient
sickness. The system is also aimed at identifying deficiencies and to facilitate timely remedial
measures in order to prevent slippage in the asset quality. The ASCC norms are applicable in
respect of all borrowal accounts subjected to MTR. Based on the conduct of the account,
adherence to various financial parameters etc., the accounts are categorized into 9 grades viz,

Standard Assets ASCC S1 to S4
Substandard Assets SS
Doubtful Assets 1st year - D1
2nd year - D2
3rd year - D3
Loss Assets Loss assets
The ASC code system is in addition to the asset classification as per the RBI guidelines.
The ASC codes are to be allotted during the renewal of limits / MTR by the concerned
sanctioning authority / reviewing authority. Efforts must be put to improve the asset
classification.
3. Monitoring of special watch list accounts :
A system of reporting Special Watch Accounts is in vogue as an effective system of monitoring
accounts showing delinquency tendencies. The branches report accounts wherein the overdues
and/or irregularities persist/continue for more than 30 days in this statement.
3.1 Early warning signals & submission of Special Watch List Statement:
The indications showing first sign of weaknesses on health of accounts are treated as early
warning signals. All accounts displaying unsatisfactory dealings/ early warning signals are put
under special watch list for follow up and time bound actions are to be taken to prevent slippage
to NPA. The following types of accounts shall be reported in the Special Watch list:
i) Running accounts - where the accounts are showing overdues for a period of more than 30
days; Overdue PCs outstanding beyond 30 days from the due date. Where any amount
which has fallen due for payment and remains unpaid for a period of more than 30 days
ii) Running accounts - where the regular limits/ adhoc limit / Adhoc Overlimit or Single
transaction limits are not renewed/ reviewed/ regularized beyond 1 month from due date
stipulated in the sanction.
iii) Term loans where interest and/or installment of principal remain overdue for a period of more
than 30 days.
iv) Running accounts - where the drawings are allowed in an account based on the drawing
power calculated from stock statements older than 1 month from the due date for
submission.
v) Bills both demand and usance remaining overdue for more than 30 days from the date of
purchase/ due date respectively.
vi) Devolved NFB facilities outstanding beyond 30 days from the date of devolvement.
Accounts which are otherwise to be classified as NPA as per IRAC norms need not be included
in this statement.
In respect of the accounts, which are reported under SWL, other irregularities like pending
EMT, Documentation etc, if any, shall also be incorporated under relevant column.

The Special Watch list statement is categorized in to 5 Parts namely,
Part A - All Borrowers with limit including and upto Rs 1 lac.
Part B - All Borrowers with limit of > Rs 1 lac including upto Rs 5 lac.
Part C - All Borrowers with limit of > Rs 5 lac including upto Rs 25 lac
Part D - All Borrowers with limit of > Rs 25 lac including upto Rs100 lac.
Part E - All Borrowers with limit of > Rs 100 lac.
Parts A & B shall be submitted monthly and Parts C to E shall be submitted fortnightly in the
stipulated format. The due date of the statement is 15th and last day of every month. Part D & E
accounts shall be individually reported to CM Wing, HO with all the required details. Detailed
procedural guidelines have been issued regarding proper compilation and prompt submission of
SWL.
While submitting the statements Branches/Offices have to certify that all accounts which are
eligible to be classified under the category of Special Watch are reported in the statement and
the accounts which are showing overdues/irregularities of more than 90 days are not included in
the subject statement
Monitoring of SWL accounts:
(i) Parts A to E shall be primarily reviewed at Branches.
(ii) In respect of Part B to E, Branch wise/ account wise review of S W L accounts shall be
carried out at Circles.
(iii) Part E (> Rs 100 lac accounts) accounts shall also be individually reviewed at CM Wing, H
O.
(iv) All accounts appearing in SWL shall be individually reviewed by the branches/ offices and
necessary remedial measures like recovery/ regularization of the overdues, extension of
PC period, extension of usance period of Bills, rephasement/ restructuring of the account,
etc., shall be initiated, to prevent the accounts slipping to NPA & also to bring the accounts
out of SWL.
(v) The accounts which are appearing in the Special Watch List for the first time have to be
monitored closely and if such accounts are repeatedly appearing in the statement,
meticulous scrutiny to examine the need for revival/ restructuring/ rephasement to be
carried out.
(vi) In respect of accounts requiring rephasement/restructuring, it is to be ensured that
proposals are taken up well in advance so that the decision is received well before the
overdues or irregularities complete 90 days.
(vii) Video Conferencing, Tele Conferencing as well as Interface meeting with Circles shall be
held by Credit Review & Monitoring Section, C M Wing, HO, at not less than quarterly
intervals to discuss on accounts appearing in part E individually & overall SWL position of
the Circles & guide the Circles on necessary strategies to prevent slippage of accounts to
NPA.

4. Credit Monitoring Format (CMF)
Bank has put in place a system for monitoring of high value credit through Credit Monitoring
Format, to be submitted not later than 10 days from the due date.
All borrowal accounts with total credit (FB+NFB) limits of Rs 1 Cr & above shall be monitored
once in 2 months at branch level. Branches are required to submit a bimonthly Credit
Monitoring Format (CMF) covering an over view on the conduct of the account.
Bank has devised a web-based package for on-line submission and review CMF. A structured
format has been devised to bring out the changes for better and effective monitoring with focus
on performance, behaviour and conduct of the account, compliance of sanction terms,
perfection of securities and to ensure that the conduct of the account continues to be
satisfactory.
Monitoring of borrowal accounts upto a limit of Rs. 1 crore shall be done by branches. Though
monitoring of credit exposure of Rs. 1 crore and above through on line CMF is done at other
levels, Branches shall continue to monitor these accounts from their end on day to day basis
5. Monitoring of High Value Credit (Rs.10.00 crore & above):
Considering the thrust to maintain the quality of the assets, particularly in respect of high value
credit, monitoring of high value exposure accounts of Rs 10.00 crores and above but below
Rs.50 crores (including MSME Sector & excluding agriculture) shall be undertaken by CM
Wing, HO and monitoring of high value exposure of Rs.50 crore & above (including MSME
Sector & excluding agriculture and all PCB accounts) shall be undertaken at CM Wing, HO.
Non LPD, Non BIFR NPA accounts are also to be covered.
The monitoring of Sick, BIFR accounts shall be undertaken at Recovery Wing HO, whereas the
borrowal accounts under Agriculture credit shall be monitored by Priority Credit Wing, HO
based on various monitoring tools available in the Bank for this purpose.
Though monitoring of high value exposure of Rs.10 crores and above through online CMF is
done at HO level, Circles to continue to monitor these accounts periodically from their end also.
Monitoring at HO level is only to supplement the existing monitoring system prevailing in
branches and circles.
6. Monitoring of borrowal accounts with total exposure of Rs 200.00 Crore & above
Borrowal accounts with exposure of Rs 200.00 Crore & above shall be subjected to review and
monitoring by CM Wing. For High Risk rated accounts, quarterly review notes shall also be
placed before C&MD.
7. Stock audit reports by external agencies
Borrowal accounts that are to be subjected to stock audit, periodicity, etc., are prescribed in the
CRM policy. This audit of i stock and book debts securities will be got done through our bank
panel valuers at the prescribed periodicity.
At the beginning of the financial year Circles shall programme the Stock Audit to be conducted
during the year. Similarly, PCBs shall also programme the stock audit and inform the Circles.
The Circles/PCBs shall ensure completion of the Stock Audit as per the programme and rectify

the observations well in time.
A quarterly consolidated progress report shall be submitted by the Circles/ PCBs to C A Wing/
C M Wing, HO informing the number of Stock audits programmed during the year, completed till
the end of the quarter & the number of Stock Audits pending with reasons.
The Stock Audit reports in respect of accounts with total exposure of Rs 10 Crore &above shall
be reviewed at CA Wing/ CM Wing as the case may be as a part of the monitoring exercise
8. Quick Mortality Accounts
Slippage in the quality of a asset / downgradation to NPA status particularly in new accounts
with aggregate liability of Rs. 5 lacs and above within a period of 12 months from the date of
first disbursement, shall be identified and suitable remedial measures including identification of
staff accountability, if any, for the same shall be initiated. CO to implement quick measures to
upgrade the asset classification/early recovery.
9. Review of borrowal accounts under consortium /multiple banking arrangement
A system for half yearly portfolio review of borrowal accounts under Consortium and Multiple
Banking arrangement shall be carried out at the end of March and September, in respect of
borrowal accounts with exposure of Rs. 50 Crore and above. The coverage of the review shall
be the effectiveness of the system, information sharing, identify deficiencies, suggest steps to
improve the system, etc.
10. Credit Monitoring Officers at branches
All borrowal accounts with total credit exposure limits of Rs. 1 crore and above (Fund
based + Non fund based) shall be monitored once in 2 months by an officer in the branch
designated as Credit Monitoring Officer (CMO) for the purpose. The branches shall have a
separate department/back office for credit monitoring for carrying out review / monitoring of
advances.
Branches shall also constitute a Credit Monitoring Committee consisting of CM / AGM
(VLB/ELB), Senior Manager/Manager (Credit) and CMO. The CMO shall be the convener of the
committee meetings. This committee shall meet atleast once a week to review the report of
CMO and suggest corrective/follow up action. Any adverse development during the week as
well as the follow up action proposed/taken as per the minutes of the previous meeting shall
also be deliberated upon. The visiting executives to the branch also review the functioning of
these committees.
Circles shall review the functions of CMOs by holding CMO meets every quarter. The
functioning of each CMO shall be reviewed in detail and follow up of SWL accounts by the CMO
shall also be discussed in detail.
11. Credit Audit Objective:
The objectives of credit audit are
• To carry out independent review of risk factors in the borrowal account.
• Review on compliance status of large loans by the borrower.

• Review of compliance of post sanction terms & conditions by the branch.
• Detect early warning signals and suggest remedial measures.
• Recommend corrective action to improve credit quality.
Coverage:
The system covers scrutiny of accounts with aggregate limit of Rs 1crore and above (FB+NFB).
All fresh sanctions, renewals with enhancements/additional exposures shall be subjected to
credit audit within a period of 3-6 months from the date of disbursement.
The following will not come under the purview of Credit Audit:
• Renewal of limits without any enhancement or reduction in limits.
• Limits permitted for temporary period upto 3 months.
• Limits fully secured by deposits/ NSCs / KVPs / LIC policies.
• NFB facilities with 100% cash margin.
• Accounts coming under the purview of Special Review Section, Circle Office/SIR Section,
Recovery Wing, HO.
• Accounts under CDR, which are under rehabilitation process with separate review
mechanism in place.
• In respect of term loans, credit audit is conducted upon release of first installment of the
loan.
• However, where additional credit facilities are permitted frequently, in such cases the credit
audit shall be restricted to maximum of 2 times in a year.
The credit audit is conducted by a mix of Internal & External auditors.
Review/Process of Credit Audit Reports:
On receipt of the credit audit report at CO, the same shall be critically analyzed & placed before
the reviewing authority. The review shall be comprehensive, with a view to detect early warning
signals if any, in the accounts subjected to credit audit.
12. Quarterly/Half Yearly Operating System (QOS/HOS)
The data under QOS / HOS gives information on the operational results of the borrower
enterprise, utilization of funds, liquidity position and can be used as an important monitoring
tool.
The system of obtention of Quarterly / Half yearly Operating System (QOS / HOS) is applicable
in respect of industrial borrowers, merchant exporters, traders, borrowers under SME (both
manufacturing and service sector), etc. enjoying fund based and non-fund based working
capital limits of Rs. 5 crore and above from the banking system.
• QOS / HOS shall be applicable to all borrowers enjoying working capital facilities as
above under consortium, multiple banking system or sole banking. In the case of
consortium where we are the leaders or under multiple banking/ sole banking, the

borrower shall be required to submit the QOS and HOS. Where we are members in a
consortium, the system prevailing with the leader bank may be followed.
• In the case of borrowers wherever cash budget system is adopted as in the case of
Sugar, Tea industry, Construction activity, Leasing and HP, quarterly cash budgets are
to be obtained and reviewed.
• In respect of merchant exporters, traders etc. the QOS and HOS shall be used with
required modifications.
• Detailed analysis of QOS and HOS has to be conducted to ascertain the movement of
current assets, current liabilities, its impact on NWC and also the trends in funds flow
and profitability.
• In this regard, the Bank has evolved detailed procedural guidelines to monitor the
accounts, which shall be promptly followed.
13. Other credit monitoring tools
• Monthly Stock Statement cum select operational data (MSOD) statement to be submitted
by the borrower to the Branch as per sanction terms. Copy of the same shall be submitted
by the branches to the reviewing authority at Circle Office duly furnishing the computation
of the Drawing Power.
• Stock Inspection reports (SIR) of Branch officials shall be reviewed by the reviewing
authority at branch / Circle office as the case may be.
• Quarterly / Half yearly operating statement (QOS/HOS) to be submitted by the borrower to
the branch. Copy of the same shall be submitted by the branches to the reviewing authority
at Circle Office with their comments.
• Project Implementation Progress Reports (PIPR) for term loans to be submitted by the
borrower to the branch. In case of project finance, Lenders' Independent Engineer's Report
(LIE) shall be reviewed at periodical intervals during implementation of the project.
Overall monitoring of the borrowal accounts shall be done at the branches on a regular
basis
Follow up & Monitoring of Slippages, Non-LPD, Non-BIFR Accounts:
• The monitoring section / cell to initiate and monitor the recovery steps from day one of
account slipping into NPA and continuously undertake account wise follow up till the
accounts are revived / recovered fully or marked for recovery and transferred to LPD
account.
• Within a maximum period of 30 days of account slipping to NPA, branches to compulsorily
issue SARFAESI notice in respect of all eligible accounts (for other cases issue legal /
recall notices) irrespective of any proposals for OTS on hand. This aspect has to be
monitored by the monitoring section/cell in co-ordination with SARFAESI cell of the Circle.
• Simultaneously, the concerned Credit Section under the direction of Screening Committee
constituted to examine restructuring shall arrange examining the viability of the unit,

chances of revival/ rehabilitation/ restructuring/ upgradation of accounts, staff lapses, if
any, and to decide the future course of action in each account within 60 days of account
becoming NPA. Whenever chances of revival/ rehabilitation/restructuring are feasible,
specific note may be placed before the respective sanctioning authorities concerned and
decision conveyed to branches for further implementation.
• Where chances of revival/rehabilitation/restructuring/ upgradation of the accounts are not
found feasible and in respect of SARFAESI cases, immediately before completion of
statutory SARFAESI notice period of 60 days (but not later than 60 days from the date of
NPA) the account should be transferred to LPD/Recovery Section for recovery/legal steps
including enforcement of securities under SARFAESI etc.
• For deferring any of the above action, prior permission from the Circle Head to be obtained
for a/cs with liability below Rs. 1.00 crore and C&MD/ED for a/cs with liability of Rs 1.00
crore and above.
• Respective sanctioning sections shall take steps to transfer the file to Recovery
Section/Wing and identify staff lapses if any.
Restructuring of advances
Restructuring of advances is a process that allows an entity facing cash flow problems and
financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore
liquidity and rehabilitate so that it can continue operation. This method is also one of the
measures to strengthen the financial system. Bank shall follow the guidelines for restructuring
of advances as per the policy framework evolved in this regard. Branches/COs shall identify the
cases for restructuring, monitor progress of implementation of restructuring in all eligible
accounts and the performance of all such restructured accounts, shall be closely monitored.

NON FUND BASED FACILITIES
Letter of Credits, Guarantees, Letter of Commitment, Solvency Certificates, Standby LCs,

Buyers' credits and Capability Certificates are various types of NFB facilities available in our
Bank.NFB facilities are to be extended only to the customers of the Bank based on their past
performances and on evaluation of their future needs.
While processing NFB proposals one should follow the same precautions that are normally
followed in the case of FB facilities, including analysis of financial statements, production cycle,
ability of the borrower to meet their financial commitments, position of the industry, economic
trends etc.
LETTER OF CREDIT
A letter of credit (LC) may be broadly defined as a set of instructions of a buyer (applicant)
conveyed by his banker(issuing bank) to the seller (beneficiary) through another bank (advising
bank) in the seller's country whereby the issuing bank undertakes to pay to the seller a certain
sum of money mentioned therein upon submission of stipulated documents within a specified
period of time. An LC may provide for payment either at sight or at usance.
LC mechanism is a widely used device to finance international trade as it safeguards the
interest of both the importer(buyer) and the overseas supplier(seller).
LC is used in domestic trade transactions also and is called ILC. Import letters of credit are
called FLCs.
There are various types of LCs like Transferable LC, Confirmed LC, Back to Back LC, Red
Clause LC etc., Letters of Credits (also known as documentary credits) are governed by the
provisions of Uniform Customs and Practice of Documentary Credits (UCPDC) set by the
International Chamber of Commerce, Paris.
STANDBY LCS - IMPORTS
Stan-by Letter of Credit is a means of guaranteeing payment for an international trade
transaction. Such an LC serves as an additional fall back to the supplier for his export
collections or open account trading with the importer client. Stand-by L C opened by the
importer serves as a guarantee to the supplier abroad to obtain payment for the products to be
supplied by him over a period of time within its validity. The importer on collection basis could
receive the relative documents in respect of such supplies either through the issuing bank or
directly subject to compliance of other regulatory norms. In the event of default by the importer
the supplier abroad can invoke the stand-by-LC and obtain payment thereunder from the issuing
bank.
STANDBY LCS - INLAND
Standby LCs-inland are similar to financial guarantees which serve as an additional comfort to
the beneficiary in the event of default by the principal debtor (purchaser). Some of the salient
features of the facility are as under:

1) Facility provided to manufacturing units falling under the sanctioning powers of HO.
2) Facility extended to only PSUs, Corporates with good track record.
3) Accounts classified under ASCC S1 and S2 or Normal risk wherever the borrower
account is subjected to Credit Risk Rating & delegation of powers
4) The facility is for enabling the party to purchase/procure materials/utilities.
5) The maximum period of LC is one year.
BUYER'S CREDIT
This is a facility of Short Term Buyer's Credit for import of raw materials by extending Letter of
Comfort and/or Letter of Guarantee whereby the party arranges for borrowing abroad for paying
off the supplier on the due date of LC. This facility can be considered to the customers based on
the risk return perspective and liquidity position, from time to time
BANK GUARANTEES
A contract of guarantee is a contract to perform or discharge the liability of a third person in

case of his(third person's) default. There are three parties to a guarantee. The person who
gives the guarantee is called the 'Surety' or "Guarantor", the person on whose behalf the
guarantee is given is called the "principal debtor" and the person in whose favour the
guarantee is given is called the 'Creditor' or beneficiary.
In the case of Bank, the occasions to issue guarantee arises, whenever the customers of the
bank enter into obligations with others for construction of building, supply of raw materials,
stocks etc., or to meet pecuniary obligations. The principals call for bank guarantees from
obligors for the due performance of contract entered into or due payment of monetary
obligations. The Bank issuing the guarantee is the guarantor, the customer on whose behalf the
guarantee is issued is the "principal debtor" or the "applicant" and the principal in whose favor
the guarantee is issued is the "beneficiary". Thus the guarantee is a collateral contract,
consequential to a main contract between the applicant and the beneficiary.
TYPES OF GUARANTEES
The various types of guarantees issued by the Banks are Financial guarantees, Performance
guarantees, Advance Payment guarantees, Deferred Payment guarantees, EMD / Bid Bonds.
FINANCIAL GUARANTEE
All guarantees issued for repayment of a debt or a loan or payment of a sum without linking to
performance is financial guarantees. In a financial guarantee, the relationship between
applicant and beneficiary is that of a creditor and debtor generally.
PERFORMANCE GUARANTEE
These are the guarantees issued in respect of performance of contract or obligation. Although
these guarantees are for performance, in such cases, in the event of non- performance of the
obligations as per the terms of the contract, the bank assumes under the guarantee, only

monetary liability up to a specified amount, and for specified period and not due performance of
the contracts like construction of a building, or supply of material etc.Onne should invariably call
for copy of the underlying contact or agreement to determine whether a guarantee is for
performance or financial since the entire process of appraisal and fixing of commission differs.
ADVANCE PAYMENT GUARANTEE
Such type of guarantees are issued where the parties (Principal Borrowers) seek advance
payment form their principals to meet part of the expenses for execution of contracts or to meet
a part of working capital requirements. Principals insist for guarantee from the bank against
such advance payment and guarantees of this type are known as Advance payment
Guarantees
DEFERRED PAYMENT GUARANTEES
Issuance of Deferred payment guarantees favouring suppliers/manufactures shall arise where
goods/machineries are supplied on credit and the payment is to be made by deferred
installments.
The manufacturers/sellers will agree to supply the same only if such deferred installments are
guaranteed by the bank. The principals i.e. suppliers / manufacturers draw drafts on purchasers
which are to be accepted and payment is to be made on due dates. In the event of non
payment of installment dues by the buyer i.e. Principal debtor, the banker issuing the DPG will
have to make the payment. DPG / Co-acceptance are akin to Term Loans.
EMD / BID BOND GUARANTEES
Bid Bonds and tender guarantees are in lieu of earnest money/ security deposit

The Fair Practices Code (FPC) For Lenders adopted by the Bank
As per RBI Guidelines, FPC for Lenders shall be applicable for all loans/ advances irrespective
of the loan amount (i.e. both for loans upto Rs.2 lacs and above Rs.2 lacs
1. The Bank would have the loan application forms containing information about the fees /
charges payable for processing, the amount of such fees refundable in case of non-
acceptance of the application, pre-payment options, etc., so that a meaningful comparison
with that of other banks can be made by the prospective borrowers to enable them to take
informed decisions.
2. The Bank would give acknowledgement for receipt of all loan applications
3. The Bank would indicate the time frame within which loan applications containing full
information / details / documents will be disposed off while giving acknowledgements for
receipt of the same.
4. The Bank would verify the loan applications within a reasonable period of time. If
additional details / documents are required, it would intimate the applicant/s / borrower/s
immediately thereafter.
5. The Bank would ensure that there is proper assessment of credit applications submitted
by the applicant/s / borrower/s.
6. The Bank would carry out proper due diligence on the creditworthiness of the applicant/s /
borrower/s notwithstanding the stipulation of any security and margin made by it.
7. The Bank would make proper assessment of the borrowers' credit needs in order to take
care that the credit limit/s, which are, sanctioned meet/s the genuine requirement of such
borrowers.
8. The Bank would convey to the applicant/s / borrower/s concerned, the credit limits
sanctioned to them along with the terms and conditions thereof and obtain their specific
acknowledgement for acceptance of the same for its records. While so conveying, the
Bank would also request the applicant/s / borrower/s therein to specifically inform the
Bank in writing whether they would need a copy of the loan agreement along with copies
of all the enclosures quoted therein.
9. While conveying the terms and conditions and other caveats governing the credit facilities
stipulated by the sanctioning authority of the Bank in writing to the applicant / borrower,
the authority of the Bank as per whose orders the sanction communication has been
released would also be duly indicated therein.
10. The Bank shall invariably furnish a copy of the loan agreement along with a copy of all
enclosures quoted in the loan agreement to all the borrowers at the time of sanction /
disbursement of loans, even in the absence of specific request from the borrower.
11. The Bank would convey in writing within the time earlier indicated in the acknowledgement
given for receipt of the related loan applications, the reason/s which have led to the
rejection, if any, thereof.

12. Allowing drawings beyond sanctioned limit, honoring the cheques issued for the purpose/s
other than specifically agreed to in the credit sanction, disallowing drawings on a borrower
account on its classification as a nonperforming asset or on account of non-compliance
with the terms of sanction etc., would be solely at the discretion of the Bank. Again, the
Bank does not have an obligation to meet additional requirement/s of borrowers on
account of growth in business etc. without the proper review of the credit limits of such
borrowers.
13. In the case of lending under consortium arrangement, the Bank would have procedures to
complete the appraisal of proposals in a time bound manner to the extent feasible and
communicate its decision on financing or otherwise within a reasonable time. In respect of
credit proposals other than under consortium arrangements, the Bank shall follow the time
norms as prescribed in its Credit Policy document.
14. The Bank would ensure timely disbursement of loans sanctioned in conformity with the
terms and conditions of sanction.
15. The Bank would give the notice of any change in the terms and conditions to the
borrowers concerned. In respect of interest rates and service charges etc., the Bank
would give notice to the borrowers only in respect of any upward revision. The Bank
would also ensure that changes in interest rates and service charges are affected only
prospectively.
16. The Bank would promptly attend to any "lender-related" genuine difficulty/ies that the
borrowers may face.
17. Before taking a decision to recall / accelerate payment or performance under the
agreement or seeking additional securities, the Bank would give reasonable notice to the
borrowers concerned in writing.
18. The Bank would release all securities on receiving payment of loan or realization of loans
subject to any legitimate right or lien for any other claim; the Bank may have against
borrowers. If such right of set off is to be exercised, the borrower would be given notice
about the same with full particulars about the remaining claims and the documents under
which the Bank is entitled to retain the security till the relevant claim is settled / paid.
19. The Bank in the normal course would endeavor not to interfere in the affairs of its
borrowers which are not either directly or indirectly related to its extending the credit
facilities unless new information not earlier disclosed by the borrowers concerned has
come to the notice of the Bank
20. The Bank will not discriminate on grounds of sex, caste and religion in the matter of
lending. However, this does not preclude the Bank from participating in credit-linked
schemes framed for weaker sections of the society.
21. In the matter of recovery of loans, the Bank would not use any muscle power.
22. In case of receipt of request for transfer of borrowers' accounts either from such
borrowers or from the banks / FIs which propose to take over the accounts, the consent or
otherwise of the Bank, would be conveyed within 15 days from the date of receipt of such

requests if the related accounts are within the sanctioning powers delegated to any of the
officials at the branch level. In respect of a request for transfer of a borrower account
which is within the sanctioning powers of officials at RO / CO / HO, the branch concerned
would take up with the concerned authority within 7 days of receipt of such requests and
the latter would communicate decision thereon within 15 days from the date of receipt of
the related recommendations from the branch/ CO.
The Bank would have a Grievance Redressal Mechanism within the organisation to resolve
disputes, if any, arising in relation to the FPC for lenders where all disputes arising out of the
decision of a Bank's functionary falling upto the sanctioning powers of C&MD are heard and
disposed off at least by the next higher authority at RO / CO / HO. In respect of proposals falling
under the sanctioning powers of the Management Committee (MC) of the Board, grievances if
any, would be redressed only by the said MC of the Board. The Bank would also conduct
periodical reviews of the compliance to this Fair Practices Code and the functioning of the
grievance redressal mechanism at various levels. A consolidated report of such reviews would
be submitted to the Board of Directors of the Bank at regular intervals

ANNEXURE I-APPLICATION AND OTHER FORMS
Application forms:
For all Micro & Small Enterprises NF998 For Medium enterprises upto Rs NF836
(For both Industry & Service) 2 Lacs
For Medium enterprises Rs.2 Lacs - NF837 For Medium enterprises Rs.15 NF838
15 Lacs Lacs -1Crore
For Medium enterprises above Rs 1 NF903* *and NF381 (CMA data)
Cr wherever required
For other priority loans-upto Rs NF413 For other priority loans - above NF414
25000 Rs 25000
Other forms to be submitted:-

1. Financial statements - (please refer guidelines on audited financial papers)-In
respect of existing units, Audited papers for the last three years, current year
estimates and projections for the next year are to be submitted with actual
monthwise figures for the current year. In respect of new units projected financial
statements are to be obtained for atleast the next three years if WC only is
involved. If term loan is involved, apart from the above projected balance sheet,
profit and loss account ,& funds flow statements for the period covering the entire
repayment period are to be obtained.
2. NF 589 - details of outside business net worth of the party/co-ob/guarantor
3. NF 484 -certificate from Micro & Small Enterprises for value of investment in plant
and machinery
4. For all working capital limits above Rs.100 lacs CMA data in NF 381 to be
submitted by the party along with the application.
5. Certification of accounts in NF 596 wherever audit is not required
6. Declaration in NF 363 should be obtained to ensure that the borrowers are not
related to any of the officers/directors of the bank.
CREDIT REPORT is to be submitted in NF 741 by the branch along with NF 563
resume of accounts , application & CMA data wherever applicable from the party as
above, NF 589, along with financial papers, LSR, LSR check list, site visit report,
valuation report, CIBIL report, RISK RATING sheet & all other documents related to the
proposal.
In respect of term loans, apart from the above, project report& project appraisal report,
approved plan & estimate, licenses, govt. clearances like pollution control etc, and other
documents related to the project are also to be submitted with the credit report
*******************************

Your views and suggestions can be sent to us
@
feedback2stc@canarabank.com
Staff Training College

‘Dwarakanath Bhavan’
29 K R Road Basavanagudi
Bengaluru 560 004
(FOR INTERNAL CIRCULATION ONLY)

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STAFF TRAINING COLLEGE

2 Time Norms for disposal of Loan applications 5

3 Guidelines on Credit Information Reports 8

4 Internal Credit Risk Rating 10

5 Guidelines on obtention of Financial Statements 13

6 Components of Financial Statements 14

8 Working Capital - Methods of Assessment 25

9 Micro Small and Medium Enterprises MSMEs 30

12 Non Fund Based limits 52

13 Fair Practices code 55

i. Open Cash Credit (OCC)

CREDIT AWARENESS PROGRAMME FOR CLERKS 1

iii. Produce Loan

vi. Packing Credit, Clean Packing Credit

vii. Canara Trade

viii. Bills Limits (SDB, BE, Supply Bills)

ix. Export Bills received for Discount / Negotiation - FDB / FBE

i. Short Term Loans - Repayable in a period less than 36 Months

2. Non - Fund based Facilities

ii. Bank Guarantees

iv. Buyer's Credit

vi. Solvency Certificates

vii. Capability Certificates

CREDIT AWARENESS PROGRAMME FOR CLERKS 2

CREDIT AWARENESS PROGRAMME FOR CLERKS 3

CREDIT AWARENESS PROGRAMME FOR CLERKS 4

6 Advances under Sole Banking, Multiple

(i) Sanction of fresh/ enhanced credit 30 days 45 days 60 days

(ii) Renewal of existing credit limits 30 days 45 days 45 days

hereunder: PROGRAMME FOR CLERKS

Sl. Nature of credit Facilities MODIFIED GUIDELINES

Medium Ent 4 wks 4 wks 4 wks

4 Loans beyond Rs 25 lakhs Micro & Small 8 wks 8 wks

Medium Ent 30 days 45 days 8 wks

REJECTION OF CREDIT PROPOSALS:

CREDIT AWARENESS PROGRAMME FOR CLERKS 6

CREDIT AWARENESS PROGRAMME FOR CLERKS 7

CREDIT AWARENESS PROGRAMME FOR CLERS 8

CREDIT AWARENESS PROGRAMME FOR CLERS 9

Credit Risk Framework in our bank

CREDIT AWARENESS PROGRAMME FOR CLERKS 10

Overall risk score Risk Grade description

> 100 III Low Risk (LR 3) Good

> 85 & up to 100 IV Normal Risk Satisfactory

> 70 & up to 85 V Moderate risk Just adequate & needs close

CREDIT AWARENESS PROGRAMME FOR CLERKS 11

CREDIT AWARENESS PROGRAMME FOR CLERKS 12

Provisions regarding Audit of Financial Statements to be Submitted :

CREDIT AWARENESS PROGRAMME FOR CLERKS 13

Items appearing in Balance Sheet:

CREDIT AWARENESS PROGRAMME FOR CLEKRS 14

CREDIT AWARENESS PROGRAMME FOR CLEKRS 15

CREDIT AWARENESS PROGRAMME FOR CLEKRS 16

CREDIT AWARENESS PROGRAMME FOR CLEKRS 17

CREDIT AWARENESS PROGRAMME FOR CLEKRS 18

CREDIT AWARENESS PROGRAMME FOR CLEKRS 19

CREDIT AWARENESS PROGRAMME FOR CLERKS 20

3. Debt Service Coverage Ratio (DSCR):