Course: Credit Management (Module II: Credit Operations) NIBM, Pune

Module II: Credit Operations

Chapter 2: Corporate Lending

Shri R Mani

Objective
This chapter discusses the nuances of lending to corporate sector and includes their
definition, characteristics, types of loans, exposure limits, institutional arrangement for
lending, workflow and organization structure for credit appraisal and monitoring.

Structure
1. Introduction
2. Definition and characteristics of corporate entities
Definitions
Characteristics
3. Sources of finance for corporates
Internal sources
External sources
Factors affecting choice of source of finance
4. Types of corporate loans
5. Credit appraisal note for corporate loans
6. Exposure limits for corporate lending
7. Institutional arrangements for corporate lending
Loan syndication
Multiple banking
Consortium lending
Joint lending forum
8. Organizational structure
9. Work flow for corporate loan processing
10. Monitoring of corporate loans

1. Introduction

India has achieved a phenomenal economic growth over the last three decades after
liberalization. Corporate businesses have contributed significantly to the achievement of
such growth. Currently, there are more than 5200 companies listed in Bombay Stock
Exchange (BSE) whose present market capitalization is around Rs.151 lakh crores and the
number of registered investors was around 3.71 crores(as of November 2017).

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Banks provide corporate banking services to large companies that include customised
financing and transaction services for day-to-day operations. On account of their large
business size, corporate entities will access both credit market and capital markets as
sources of finance. Accordingly, corporate financing by banks include arranging credit as
well as capital market funds. Accordingly, they pose risks that need to be managed.

The corporate banking market offers great opportunities for banks to expand their credit
portfolio and enhance their earnings. Some Indian banks have corporate assets as much as
50% of their portfolio. The importance of corporate banking can be inferred from the fact
that large amount of business and income comes from corporate banking. For example,
corporate loan segment of for the following leading banks for the year ending 20163 show
that:
 Punjab National Bank earned revenue of Rs.23043.07 crores from corporate
segment in Mar 2017. The segment asset value stood at Rs.3.24 lakh crore.
 Indian Bank earned revenue Rs.6679.21 crores from corporate segment in March
2017. The segment asset value stood at Rs.0.78 lakh crore.
At the same time corporate entities, due to reasons of being large, are likely to be
impacted by business cycles more frequently. This has asset quality implications for
banks. In the recent years banks are facing huge stress on account of NPA’s in corporate
segment. .

2. Definition and characteristics of corporate entities

Definitions
The term ‘body corporate’ is defined in section 2(11) of the Companies Act 2013. This
includes a private company, public company, one person company, small company,
limited liability partnerships, foreign company, etc. Body corporate or corporation also
includes companies incorporated outside India. However it does not include a co-
operative society registered under any law relating to co-operative societies.
Corporate entities can be of various types, of which a few are listed below:
i. Local Corporate
ii. Multinational Companies
iii. Financial Institutions
iv. Public Sector Undertakings

i. Local Corporates are private limited companies, public limited companies as well
as certain large reputed trusts.

2
November 2017
3
From the annual reports of the banks

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ii. Multinational Company (MNC) is an enterprise operating in several

countries but managed from one (home) country. Generally any company or
group that derives a quarter of its revenue from operating outside of its home
country is considered a MNC corporation. They are also referred
synonymously as transnational or international corporations. MNCs engage in
foreign direct investment (FDI) in host country plants for equity ownership
and managerial control. They are thus are known to bring technology and
expertise from abroad and improve skills and create jobs, which boost the local
economy of the host country. MNCs are usually large and are controlled by their
parent companies.

iii. Financial institutions (FI) collect funds from public and deploy them for
creating financial assets such as deposits, loans and bonds, rather than tangible
property. They are able to provide large volumes of finance on the basis of
small deposits or unit capital. Some of the relevant FIs raising short term loans
from banks include EXIM Bank, NABARD, LIC of India, GIC, HUDCO, NHB, IFCI,
State Financial Corporation and State Government Development Corporation.

iv. Public Sector Undertaking (PSU) is a state owned enterprise in India under the
Union Government or one of the many state or territorial governments or both.
Majority stock of a PSU is owned by the Government. PSUs are categorized as
Maharatna, Navratna and Miniratna on the basis of the financial performance,
net worth, revenue, profit etc. Guidelines on such criteria are issued by
Department of Public Enterprises which is a nodal department for all Central
Public such enterprises.

Some important PSE’s are BHEL, Coal India Ltd., NTPC, ONGC, BPCC, EIC, NMDC, NLC, PFC, REC,
SCI, CWC, Dredging Corporation India Ltd, MMTC STC, RITES Limited, and NHFC, PEC
Limited.

Indian Companies Act, 2013

Indian Companies Act 2013 replaced Indian Companies Act 1956. This Act makes detailed
provisions to govern all listed and unlisted companies in the country. The Companies Act
2013, incorporated new sections and repealed certain corresponding sections of
Companies Act 1956. This legislation has for reaching consequences on all companies
incorporated in India. Important changes on account of the new Act are
 Increase in number of Shareholders: Maximum number of members
(shareholders) permitted for a private limited company is increased to 200 from
50.
 Limit on Maximum Partners: The maximum number of persons/partners in
any association/partnership may be up to such number as may be prescribed but

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not exceeding one hundred. This restriction will not apply to an association or
partnership, constituted by professionals like lawyer, chartered accountants,
company secretaries, etc. who are governed by their special laws. Under the
Companies Act 1956, there was a limit of maximum 20 persons/partners and
there was no exemption granted to the professionals.
 One person company is also permitted. The Act provides for new form of private
company comprising a single person. It may have one director and one
shareholder
 More powers are given to shareholders.
 Class action suits for Shareholders: The Companies Act 2013 has introduced new
concept of class action suits with a view of making shareholders and other
stakeholders, more informed and knowledgeable about their rights.
 More power for Shareholders: The Companies Act 2013 provides for approvals from
shareholders on various significant transactions.
 Women empowerment in the corporate sector: The Companies Act 2013
stipulates appointment of at least one woman Director on the Board (for certain
class of companies).
 Corporate Social Responsibility: The Act stipulates certain class of Companies to
spend a certain amount of money every year on activities/initiatives reflecting
Corporate Social Responsibility.
 National Company Law Tribunal: The Act introduced National Company Law
Tribunal and the National Company Law Appellate Tribunal to replace the
Company Law Board and Board for Industrial and Financial Reconstruction. They
would relieve the Courts of their burden while simultaneously providing
specialized justice.
 Fast Track Mergers: The Act proposes a fast track and simplified procedure for
mergers and amalgamations of certain class of companies such as holding and
subsidiary, and small companies after obtaining approval of the Indian
government.
 Cross Border Mergers: The Act permits cross border mergers, both ways; a
foreign company merging with an India Company and vice versa but with prior
permission of RBI.
 Prohibition on forward dealings and insider trading: The Act prohibits
directors and key managerial personnel from purchasing call and put options of
shares of the company, if such person is reasonably expected to have access to
price-sensitive information.
 Entrenchment in Articles of Association: The Act provides for entrenchment (apply
extra legal safeguards) of articles of association have been introduced.
 Electronic Mode: The Act proposed E-Governance for various company processes
like maintenance and inspection of documents in electronic form, option of
keeping of books of accounts in electronic form, financial statements to be placed on
company’s website, etc.

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 Indian Resident as Director: Every company shall have at least one director who
has stayed in India for a total period of not less than 182 days in the previous
calendar year.
 Independent Directors: The Act provides that all listed companies should have at
least one-third of the Board as independent directors. Such other class or classes
of public companies as may be prescribed by the Central Government shall also be
required to appoint independent directors. No independent director shall hold
office for more than two consecutive terms of five years.
 Serving Notice of Board Meeting: The Act requires at least seven days’ notice to call
a board meeting. The notice may be sent by electronic means to every director at
his address registered with the company.
 Duties of Director defined: Under the Companies Act 1956, a director had
fiduciary (legal or ethical relationship of trust) duties towards a company.
However, the Companies Act 2013 has defined the duties of a director.
 Liability on Directors and Officers: The Act does not restrict an Indian company
from indemnifying (compensate for harm or loss) its directors and officers like the
Companies Act 1956.
 Rotation of Auditors: The Act provides for rotation of auditors and audit firms in
case of listed companies, unlisted public companies and private limited companies
fulfilling certain criteria.
 Prohibits Auditors from performing Non-Audit Services: The Act prohibits
Auditors from performing non-audit services to the company where they are
auditor to ensure independence and accountability of auditor.
 Rehabilitation and Liquidation Process: The entire rehabilitation and
liquidation process of the companies in financial crisis has been made time bound
under Companies Act 2013.

Characteristics

A company as an entity has many distinct features which together make it a unique
organization. The essential characteristics of a company are following.

Separate Legal Entity

Under Incorporation law, a company becomes a separate legal entity as compared to its
members. The company is distinct and different from its members in law. It has its own seal
and its own name, its assets and liabilities are separate and distinct from those of its
members. It is capable of owning property, incurring debt, and borrowing money,
employing people, having a bank account, entering into contracts and suing and being
sued separately.

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Limited Liability

The liability of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay only the
uncalled money due on shares held by him. If the assets of the firm are not sufficient to pay
the liabilities of the firm, the creditors can force the partners to make good the deficit
from their personal assets. This cannot be done in the case of a company once the members
have paid all their dues towards the shares held by them in the company. A company may
also be limited by shares. In a company limited by guarantee, the liability of the members
is limited to the amount they had agreed upon to contribute to the assets of the company
in the event of it being wound up.

Perpetual Succession

A company does not cease to exist unless it is specifically wound up or the task for which
it was formed has been completed. Membership of a company may keep on changing from
time to time but that does not affect life of the company. Insolvency or Death of member
does not affect the existence of the company.

Separate Property

A company is a distinct legal entity. The company's property is its own. A member
cannot claim to be owner of the company's property during the existence of the
company.

Transferability of Shares

Shares in a company are freely transferable. When a member transfers his shares to
another person, the transferee steps into the shoes of the transferor and acquires all the
rights of the transferor in respect of those shares.

Common Seal

A company is an artificial person and does not have a physical presence. Thus, it acts
through its Board of Directors for carrying out its activities and entering into various
agreements. Such contracts must be under the seal of the company. The common seal is the
official signature of the company. The name of the company must be engraved on the
common seal. Any document not bearing the seal of the company may not be accepted as
authentic and may not have any legal force. However, the use of common seal is optional
under Companies Act 2013.

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Capacity to sue and being sued

A company can sue or be sued in its own name as distinct from its members.

Separate Management

A company is administered and managed by its managerial personnel i.e. the Board of
Directors. The shareholders are simply the holders of the shares in the company. They
need not be necessarily the managers of the company.

One Share-One Vote

The principle of voting in a company is one share-one vote i.e. if a person has 10 shares, he
has 10 votes in the company. This is in direct distinction to the voting principle of a co-
operative society where the "One Member - One Vote" principle applies i.e. irrespective
of the number of shares held, one member has only one vote.

Sources of finance for corporates

Sources of finance for corporate entities can be classified into:

– Internal sources (raised from within the organisation)
– External sources (raised from an outside source)

The features/description of the various sources and the advantages/disadvantages of the

respective sources are summarised and furnished in the table below.

Internal sources

Features/Description Advantages Disadvantages

i. Owner’s investment Doesn’t have to be There is a
 This is money which comes from the repaid limit to the
owner/s own savings amount an
 It may be in the form of startup capital No interest is payable owner can
- used when the business is setting up invest
 It may be in the form of additional
capital
– perhaps used for expansion
 This is a long-term source of finance

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ii. Retained Profits Doesn’t have to be Not available to

 This source of finance is only available repaid a new business
for a business which has been trading
for more than one year No interest is payable Business may
 It is when the profits made are not make
ploughed back into the business enough profit to
 This is a medium or long-term source of plough back
finance
iii. Sale of Stock Quick way of raising Business will
 This money comes in from selling off finance have to take a
unsold stock. reduced price
 This is what happens in the January sales By selling off stock it for the stock
 It is when the profits made are reduces the costs
ploughed back into the business. associated with-
 This is a short-term source of finance. holding them

iv. Sale of Fixed Assets Good way to raise Some

 This money comes in from selling off finance from an asset businesses are
fixed assets, such as: that is no longer unlikely to have
o a piece of machinery that is no needed surplus assets to
longer needed sell
 Businesses do not always have surplus
fixed assets which they can sell off Can be a slow
 There is also a limit to the number of method of
fixed assets a firm can sell off raising finance
 This is a medium-term source of finance
v. Debt Collection No additional cost in There is a risk
• A debtor is someone who owes a getting this finance, it that debts owed
business money is part of the can go bad and
• A business can raise finance by businesses’ normal not be repaid
collecting the money owed to them operations
(debts) from their debtors
• Not all businesses have debtors i.e.,
those who deal only in cash
• This is a short-term source of finance

External sources

Features/Description Advantages Disadvantages

i. Bank Loan Set repayments are Can be
 This is money borrowed at an agreed spread over a period expensive due
rate of interest over a set period of of time which is good to interest
time for budgeting payments
 This is a medium or long-term source
of finance Bank may
require security
on the loan

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ii. Bank Overdraft This is a good way to Interest

 This is where the business is allowed to cover the period is repayable on
be overdrawn on its account between money the amount
 This means they can still write cheques, going out of and overdrawn
even if they do not have enough money coming into a
in the account business Can be
 This is a short-term source of finance expensive if
If used in the short- used over a
term it is usually longer period of
cheaper than a bank time
loan
iii. Additional Partners Doesn’t have to be Diluting control
 This is sources of finance suitable for a repaid of the
partnership business partnership
 The new partner/s can contribute No interest is payable Profits will be
extra capital split more ways

iv. Share Issue Doesn’t have to be Profits will be

 This is sources of finance suitable for a repaid paid out as
limited company Dividends to
 Involves issuing more shares No interest is payable more
 This is a long-term source of finance shareholders

Ownership of
the company
could change
hands
v. Leasing Businesses can have Can be expensive
 This method allows a business to the use of up to date
obtain assets without the need to pay a equipment The asset
large lump sum up front immediately belongs to the
 It is arranged through a finance finance
company Payments are spread company
 Leasing is like renting an asset
over a period of time
 It involves making set repayments
which is good for
 This is a medium-term source of finance
budgeting
vi. Hire Purchase Businesses can have This is an
 This method allows a business to the use of up to date expensive
obtain assets without the need to pay a equipment method
large lump sum up front immediately compared to
 Involves paying an initial deposit and buying with
regular payments for a set period of Payments are spread cash
time over a period of time
 The main difference between hire which is good for
purchase and leasing is that with hire budgeting
purchase after all repayments have Once all repayments
been made the business owns the asset are made the
 This is a medium-term source of finance business will own the
asset
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vii. Mortgage Business has the use This is an

 This is a loan secured on property of the property expensive
 Repaid in instalments over a period of method
time typically 25 years Payments are spread compared to
 The business will own the property over a period of time buying with
once the final payment has been made which is good for cash
 This is a long-term source of finance budgeting
If business does
Once all repayments not keep up with
are made the repayments the
business will own the property could
asset be repossessed
viii. Trade Credit Business can sell the Discount given
 Trade credit is summed up by the goods first and pay for cash
phrase: “ buy now pay later” for them later payment would
 Typical trade credit period is 30 days be lost
 This is a short-term source of finance Good for cash flow
Businesses need
No interest charged if to carefully
money is paid within manage their
agreed time cash flow to
ensure they will
have money
available when
the debt is due
to be paid
ix. Government Grants Don’t have to be Certain
 Government organisations such as repaid conditions may
Invest NI offer grants to businesses, apply (e.g.)
both established and new location
 Usually certain conditions apply, such
as where the business has to locate Not all
businesses may
be eligible for a
grant

Factors Affecting Choice of Source of Finance

The source of finance chosen will depend on a number of factors:

 Purpose – what the finance is to be used for

 Time Period – how long the finance will be needed for
 Amount – how much money the business needs
 Ownership and Size of the business

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4. Types of Corporate loans

Corporate entities are different from businesses as they are usually large and are
structured in the form of portfolio of business. This means that their borrowing
requirements will also be large and not limited to financing their commercial operations but
also support corporate strategies such as mergers and acquisitions, divestitures, etc.
Therefore, corporate lending involves on balance sheet products such as working capital
loans, term loans, bill discounting, etc. as well as off balance sheet products such as letter of
credit, bank guarantees, etc. The credit support offers higher flexibility compared to retail
loans such as pre-payment option, utilization option, extension option, etc. Due to their
large borrowing needs, corporate loans are usually provided not by one single bank but
by a group of banks.
The credit products offered by banks to corporate entities include working capital and
term loans, trade finance facilities, specialized loans, capital market products such as
subordinate debt and transaction banking:

i. Working capital loans1

Banks offer working capital loans as cash credit and overdraft to good corporates
which are rated not below BBB. Working capital facilities exceeding Rs. 10 crores to
the borrowers can be divided into cash credit component and loan component. In
2013, RBI had issued a circular prescribing a uniform level of 'loan component' of 80
per cent for all borrowers of working capital credit limits of Rs 10 crore and above.
As per recent RBI guidelines, in respect of borrowers having aggregate fund based
working capital limit of ₹1500 million and above from the banking system, a
minimum level of ‘loan component’ of 40 percent shall be effective from April 1,
2019. Accordingly, for such borrowers, the outstanding ‘loan component’ (Working
Capital Loan) must be equal to at least 40 percent of the sanctioned fund based
working capital limit, including ad hoc limits and TODs. Hence, for such borrowers,
drawings up to 40 percent of the total fund based working capital limits shall only
be allowed from the ‘loan component’. Drawings in excess of the minimum ‘loan
component’ may be allowed in the form of cash credit facility. (RBI/2018-
19/87DBR.BP.BC.No.12/21.04.048/2018-19dt.December5, 2018)

Banks will assess the working capital requirement by adopting various methods
such as Projected Turnover Method, Maximum Permissible Bank Finance Method,
Cash Budget Method and Net Owned Funds Method, depending upon the type of
borrower, the aggregate working capital facility enjoyed from the banking system,
the scale of operation, nature of activity or enterprise, duration or length of the
production cycle, etc.

1 Assessment of working capital and term loan have been covered in Module I.

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Line of credit (LOC)

The LOC will be allowed to meet WC requirements (Fund Based (FB) and Non Fund
Based (NFB) and other short term loans to offer flexibility to the borrowers for
utilizing the limit as per requirement. This approach gives freedom to the borrower
to utilize the entire sanctioned limit according to their need. The terms & conditions
for such LOC is mutually agreed to between banks and borrowers. Generally LOC is
sanctioned for one year. The LOC facility is permitted to PSUs and reputed corporate
with Credit (external) Rating A and above.

ii. Term loans

Term loans are provided for acquiring fixed assets such as land, building, machinery
and equipment that generate cash flows and income for repayment of the loan. Term
loans can also be obtained for purchase of technical knowhow, modernization of
plant and machinery, defraying preliminary expenses, margin for working capital
and replacement of high cost debt.

Term loans are payable back in instalments over certain number of years. These
loans can be of various maturities and denominated in both rupee and foreign
currency. Intermediate term loans have tenor of more than one year but less than
five years, while long term loans have a tenor in excess of 5 years.
Assets financed by term loans form the primary security for such loans, while other
assets, of the corporate can be taken as additional security or collateral for such loans.

iii. Bridge loans

Bridge loan is a type of gap or interim financing arrangement wherein the borrower
can get access to short-term loans for meeting short-term liquidity requirements.
Such loans help in bridging the gap between short-term cash requirements and long-
term loans. These loans are normally extended for a period of 12 months. These loans
are provided at higher rate of interest and are normally backed by asset collateral
like expected equity flows/ issues as also the expected proceeds of non-convertible
debentures, external commercial borrowings, global depository receipts and/ or
funds in the nature of foreign direct investments.

iv. Take out financing

Take-out financing is a method of providing finance for longer duration projects of
about 15 years by banks sanctioning medium-term loans for 5-7 years. In this scheme
the loan will be taken out of books of the financing bank within pre-fixed period by
another institution (called as the takeout institution), thus preventing any possible
asset-liability mismatch in the former. After taking out the loan from banks, the take
out institution could offload them to another bank or keep it. Take-out financing
institution such as IIFCL, IDFC, etc., give assurance to take the infrastructure advance
out of the original lender’s balance-sheet after a certain pre-agreed time frame.

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Take out financing can be unconditional wherein the institution agreeing to take over
the finance from the original lender assumes the partial or full risk, or can be
conditional wherein the taking over institution would have stipulated certain
conditions to be satisfied by the borrower before it is taken over from the lending
institution. As per RBI guidelines loans with a minimum of Rs 1000 crore would be
eligible for takeout financing agreement. In addition, a project should have started
commercial operation after achieving the date of commencement of commercial
operation. Besides, only standard loans are eligible for takeout financing.
v. Guarantee to service corporate bonds
In order to enable long term providers of funds such as insurance, provident and
pension funds, as also other investors, to invest in the bonds issued for funding
projects by corporates/SPVs, the Reserve Bank of India, in its Second Quarter Review
of Monetary Policy 2013-14, proposed to allow banks to offer Partial Credit
Enhancement (PCE) to corporate bonds having rating of BBB minus or better. PCE are
provided to a project as a non-funded subordinated facility in the form of an
irrevocable contingent line of credit which will be drawn in case of shortfall in cash
flows for servicing the bonds and thereby improve the credit rating of the bond issue.
Recently RBI has enhanced the PCE limit to 50% of the size of bond issue.

5. Credit appraisal note for corporate loans

Banks prepare elaborate credit appraisal note for high value corporate loans. The credit
appraisal note comprises of the following items of information upon which lending
decisions are taken.
i. Purpose of loan
ii. Internal Rating
iii. External Rating
iv. Repayment Schedule- repayment start date and repayment end date
v. Pattern of financing – whether Sole/ Joint Lending Arrangement (JLA) / Multiple
banking
vi. Defaulters list
vii. Sanction terms of other banks in JLA
viii. Group Accounts
ix. Securities offered – description of all securities, valuation of securities, legal
opinion, mortgage, CERSAI registration etc.
x. Income benefit from the exposure: interest income, non-interest income,
processing charges etc.

Most banks follow a general sequence for preparing appraisal note.

I. Profile of the borrower

 Name of the borrower
 Share holding pattern
 Details of directors
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 Products and services

 Activities
 Important customers

II. Risk assessment

 Credit rating (internal/external)
 CRILC (Central Repository of Information on Large Credits) reports
 Conduct of existing accounts and pending compliance of major inspection
irregularities if any
 Statutory dues and pending legal cases against the applicant if any
 Brief comment on the media reports if applicable.
 Whether the applicant is having unhedged foreign currency exposure
 Associate concerns and their performance and exposure.

III. Financial performance

 Funds flow/cash flow statement
 Key financial indicators for the past two years and estimates
 Comments on the current year performance - projection vs actual.

IV. Credit Assessment

 Working capital facility assessment, Term loan assessment
 Non fund based limits like guarantees/letter credit assessment
 Forward contract

Rating Models
Banks have two different ratings models – one for borrower rating (Obligor rating) and facility rating.
Borrower rating is focused on the Industry risk, Business Risk, financial Risk, and management risk,
conduct risk. Obligor rating indicates the probability of default. Facility Rating indicates the Loss given
default, for the borrower. Information on many aspects about the borrower is collected and put in the
model which gives the rating. The scores, description of risk level and comfort level is given below.
Table: Borrower Rating
S. Borrower Score Description of Risk level Remarks
No. Rating Range
1 B1 94-100 Zero or No risk Absolute safety
2 B2 90-93 Lowest Risk Highest safety
3 B3 86-89 Lower Risk Higher safety
4 B4 81-85 Low Risk High safety
5 B5 76-80 Moderate Risk with Adequate Cushion Adequate safety
6 B6 70-75 Moderate Risk Moderate Safety
7 B7 64-69
8 B8 57-63 Average risk Above Safety Threshold
9 B9 50-56
10 B10 45-49 Acceptable Risk (Risk Threshold) Safety Threshold
11 B11 40-44 Borderline risk Inadequate safety
12 B12 35-39 High Risk Low safety
13 B13 30-34 Higher risk Lower safety
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14 B14 25-29 Substantial risk Lowest safety

15 B15 <24 Pre-Default Risk (extremely Vulnerable Nil
to default)
16 B16 - Default Grade
The facility rating is about the loan product, how it is secured, cash flow, management etc. A borrower may
have facility from more than one lender and as such borrower limit and facility limits are separate but
interdependent.
Table: Facility Rating
S Facility Score Description of risk level Remarks
No rating Range
1 FG1 94-100 Virtually Zero Risk Virtually Absolute Safe
2 FG2 87-93 Lowest Risk Highest Safety
3 FG3 80-86 Lower Risk Higher Safety
4 FG4 73-79 Low Risk High Safety
5 FG5 66-72 Moderate Risk with Adequate Adequate Safety
Cushion
6 FG6 59-65 Moderate Risk Moderate Safety
7 FG7 52-58
8 FG8 45-51 Average Risk Above Safety Threshold
9 FG9 38-44
Acceptable Risk (Risk Safety Threshold
10 FG10 31-37 Threshold)
11 FG11 24-30 High Risk Low Safety
12 FG12 17-23 Higher Risk Lower Safety

13 FG13 11-16 Substantial Risk Lowest Safety

14 FG14 5-10
15 FG15 1-4 Highest Risk
16 FG16 0 NIL
Banks use rating to decide about the acceptability of the proposal. Each bank will have its own policy
about the level of acceptable risk. Normally proposals which have risk profile below the acceptable level
will be rejected. However these could be accepted if there are other credit enhancements. Internal
Rating models are used for finding out investment grade and pricing.

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V. Securities
 Legal opinion on the securities offered together with valuation reports.
 Register of Companies (ROC)/ CERSAI details.
 Insurance details

VI. Pricing and charges

 The rate of interest applicable and the justification for the same. If certain
concession in rate of interest is sought by the customer, the same should be
analysed in cost benefit basis and put up to competent authorities. Now a days
banks consider concessions if the returns are more than the hurdle rate under
RAROC (Risk adjusted return on capital) frame work.
VII. Terms and Conditions
 Important conditions include:
 Pre-release terms
 Post release terms
 Important and relevant covenants

VIII. Recommendations

The final recommendation to appraisal will also include the following:

 Industry profile,
 SWOT ( Strengths, Weaknesses, Opportunities and Threat) analysis
 Final observation and recommendation for sanction

The loan process thus finalised as above are placed before the competent
authority/Committee which further deliberate and accord sanction. In case any further
information are required, the proposal is referred back to the corporate branch for
resubmission along with details.

6. Exposure limits for corporate lending

Often projects undertaken by corporate client tend to be unusually large or complex, with
funding requirement exceeding the capacity of a single lender. The amount of the loan thus
required may be too large, the risks too high, the collateral may be in different locations, or
the uses of capital may require special expertise to understand and manage it.

Banks have to comply with RBI guidelines in respect of exposure norms which stipulate a
maximum amount of 15% of bank’s capital funds (Tier I and Tier II capital) for single
borrower and 40% for group borrowers. Under the new norms banks can have exposure
of 20% of their Tier I capital to a single counterparty, while exposure to the group would
be limited to 25% of Tier I capital. Besides, banks must also set caps on exposure to
sensitive sectors, like commodities, real estate, etc.
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Corporate entities often hold several businesses in complex structures such as holding
companies. Such structures enable corporates to pursue different business lines, while
maintaining separation between them. They also may benefit from creating internal
capital markets from achieving lower cost of funds through transfer pricing. This
however also leads to creation of structural opacity. Therefore, apart from prescribing
limits and norms for group exposure, the Reserve Bank of India has laid down rules to
define connected counterparties. It has prescribed a list of benchmarks that can be used to
determine whether different entities qualify as a ‘group’ and hence will be subject to the
group exposure limits. Some of these include:

 Subsidiaries where an entity holds more than 50 percent

 Entities where the criteria of ‘control’ is satisfied
 Entities with relationships or dependencies such that, were one of the
counterparties to fail, all of the counterparties would very likely fail
7. Institutional arrangements for corporate lending
In view of the above, and to avoid over exposure to a single corporate and also to share and
diversify the risk, banks resort to multiple banking, consortium and joint lending
arrangements. Brief descriptions of these institutional arrangements are as follows:

Loan syndication

Loan Syndication is a lending arrangement in which a group of lenders provide funds to a

single borrower. It involves several different lenders in providing various portions of a
loan. Thus, multiple lenders will work together to provide the borrower with the capital
needed, at an appropriate rate agreed upon by all the lenders.

Loan syndications involve a large amount of coordination and negotiation. Typically, loan
syndications involve a lead financial institution, or syndicate agent, which organizes and
administers the transaction, including repayments, fees, reporting and compliance, and
loan monitoring.

Generally Merchant bankers involve in this process that have correct assessment of the
projects, products, promoters, project cost and profitability projections based on sales
forecasts. In this direction the merchant banker has to take the following steps:

 Details about the project report

 Promoters contribution to the project
 Background of the promoters in detail
 Initial discussions with Promoters to know the aspects such as - estimate of
the capital cost of the project, its long term feasibility
 Assessment of Project
 Choice for sources of funds: i. Short Term, ii. Medium Term, and iii. Long Term
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 Locating sources of funds by meeting various lending Banks/Financial

Institutions
 Preliminary discussions with the lenders - have clarifications from lenders on
whether the particular industry is in a priority framework of the development
finance institutions.
 Preparation of the loan application
 Before filing the loan application the merchant bankers must ensure that the
client company has complied with all the required statutory formalities so that
appraisal of the application is not delayed.
 In the case of consortium approach or joint financing of the project , the
application will be filed with one development finance institution and the
company or the merchant banker will deal with only one institution termed as
‘lead institution’ . The project will be appraised and sanctioned under ‘single
window’
 Rendering assistance in project appraisal from different angles viz. technical,
financial, managerial, economic and social.
 Obtaining letter of intent from the lending institution or bank. The appraising
institution takes the matter to its board of directors or the appraising office
may put up the proposal with full appraisal note before the sanctioning
authority for according necessary sanction. Then the financial institution
informs the applicant borrower of such sanction along with the detailed terms
and conditional and arrangements of any with other lending FI s in case of
consortium financing.

Upon firming the process of loan syndication, the Corporate choose to go in for either
multiple banking system or consortium arrangement as the case may which are detailed as
under.

Multiple banking system

In this arrangement, a group of banks normally share the working capital requirement
sought by the Corporate. The individual member bank secures the advances by creating
charges individually. However in due course, multiple banking could result in credit
indiscipline and lack of proper exchange of information among the lenders. This gives
room for the company to take multiple finance against an undivided pool of chargeable
current assets. Lending banks may find the assessment of credit limit in a multiple
banking scenario quite challenging.

Consortium system

In this, the financing banks come together and share the credit exposure. As such they have
at least one safe guard against over financing. Further by virtue of the inter-se- document
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executed among the member banks, all the banks enjoy a first pari-passu charge on the
common asset financed- whether it is working capital or term loan. On behalf of all the
member banks, the lead bank (who has a major of total loans) files the charges on the
assets of the Company with Register of Charges (ROC). Documentation could be joint.
However the member banks take their individual documents also to cover their
respective exposure of credit limits.

Joint Lending Arrangement (JLA)

In view of certain shortcoming noted in the operation of the above two a system, the JLA has
been introduced whose salient features are:

 A single borrower with aggregate credit limits (both fund based and non-
fund based) of Rs.150 crore and above involving more than one PSB is
eligible to avail loan under JLA.
 If the aggregate working capital exposures (both Fund Based (FB) & Non
Fund Based (NFB) is up to Rs.1000 crores, then the minimum share of a
member bank must be not less than 10% of the aggregate working capital
limits sought for.
 Banks, who take a share of term loan under JLA normally, also provide
working capital finance.
 While sanctioning credit facilities to the borrower by JLA members, credit
reports of the borrower from various credit information companies like
CIBIL has to be carefully analysed.
 The bank from which the borrower has sought maximum credit will be
designated as lead bank for the JLA.
 The JLA may include private sector banks and also All India Financial
Institution as members.
 Provision is made in the JLA to ensure that there is no delay in tie up of the
loan requirement with members of JLA with a reasonable time say 90 days of
taking credit decision.
 Appraisal by lead bank/ subcommittee to be completed in 20 days.
 Circulation of draft appraisal note to be done by the Lead Bank after
convening the JLA meeting in 10 days.
 Sanction by the member of JLA is to be done in 15 days.
 The Lead Bank is permitted to charge a suitable annual fee on the total
borrowing as lead bank charges

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Documentation under JLA

The set of documents under JLA will be designed and circulated by to Indian Bank’s
Association (IBA). IBA approved JLA documents should be adopted. The documentation
should be completed within 15 days of accepting sanction and its terms which include the
rate of interest.
Borrowers enjoying credit facilities under JLA will not be extended any other credit
facility by banks and FI’s and to those who are not members of the JLA. In case, if such
requirements arise, the outside lender should seek concurrence of the existing JLA
member bankers. This clearly saves banks from possible credit indiscipline of the
borrower.

8. Organization structure for corporate lending

Banks segment their organization structure for lending to corporates under different
verticals namely Mid-corporate and Large corporate. The classification between the two
segments may be based on their annual turnover or size of exposure. For example, some
banks may classify mid corporate as those upto Rs. 250 crores while those with higher
turnover are classified as large corporate. As per the size of the exposure (fund
based/non fund based) measure of classification, loans up to Rs. 80 crores can be
classified as mid corporate and those exceeding as large corporate.

These verticals operate with an objective of giving focused attention after pooling the
skilled staff of bank for dealing on credit aspects. They operate with targets such as:
 Better quality Loan portfolio
 Quicker decision making
 Increasing market share
 Better customer selection and
 Offering the right product.

Role of Corporate Branches

The broad role played by the corporate branches are-

 Market survey of the area of operation.
 Identification of potential customers.
 Analysis of various activities of corporate in the area.
 Processing the proposals within a short period say 30 days that is quick
turnaround time
 Maintaining the accounts in the branch after getting sanction from competent
authorities, Taking care of the requirements of the employees of the corporate and
increase cross selling of various bank products.
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9. Work flow for corporate loan processing

Efficient functioning of corporate lending operations depends upon structured process

flow. The work flow for corporate loan processing can be broadly divided and sequenced
as follows:

i. Lead generation
 By Marketing Offices (MOs)
 By Relationship Managers (RMs)
 By other branches which cannot handle such accounts but can actively refer such
leads from this areas.

ii. The application may be accepted through online portals. Some banks give the
online application forms in their website. This will help the prospective borrower
to understand all the data and documents required to complete the application in
full.

iii. Some customers can contact the branches to help them fill up the applications. The
relationship managers can help such applicants to fill up the details properly. The
RM also can clarify various doubts raised by the applicant besides explaining the sources
from which such data are available.

iv. Once an application is received in full, along with the required data, attachments etc.
the branch has to give an acknowledgement.

v. Once the application is received and acknowledged, the time starts for the branch
to start the scrutiny and processing. Generally the upfront processing fee and fee for
legal security reports and engineers valuation etc. are collected by the branch.

vi. On receipt of the application fee, the branch head allocates the application to a
Relationship Manager who is well versed in that particular segment. For example,
textiles, engineering goods, export units, NBFC, power, automobiles etc.

vii. The Relationship Manager will scrutinize the proposals focusing at the following:
 Verification of Consumer CIBIL, Commercial CIBIL
 RBI defaulters list
 RBI caution list
 ECGC SAL list* (SAL means Specific Approval List of ECGC).
[* Banks cannot grant loans to exporters in the SAL without prior approval from
ECGC. This implies that SAL listed exporters have to be handled with extreme care
and caution for variety of reasons].

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 CRILC ( Central Repository of Information on Large Creditors)

 Banks NPA list (whether the applicant is already a defaulter to the bank)

This verification will result in either accepting for further processing or rejection at this
level based on the revelations of the verification process.

Once cleared for processing, the RM will seek further clarification to fill up the application
in complete form with all required information.

Then the entry level RAM (Risk Assessment Model) rating is done. External rating is
obtained for proposals seeking a loan limit exceeding Rs.5 crores and above. Fresh
proposals will require TEV (Techno Economic Viability) study. Even at this level, if the TEV
considers the proposal as unviable, it can be rejected.

The bank’s authorized officials must make visits to the business premises and verify,
personally, the existence of business as also the primary and collateral securities. Legal
report and engineer’s valuation report are collected and perused. A few banks, obtain two
opinions in these areas from two different lawyers and valuers to ensure correct
valuation.
10. Monitoring of corporate loans

Monitoring the corporate loan accounts is necessary to keep the credit portfolio under
standard asset category at all point of time. Since corporates are more likely to be affected
by business cycle, their chances of getting into sickness are always high. Effective
monitoring coupled with close eye on early warning signals can help identify symptoms
of sickness, weakness and deterioration of asset quality. This will help the bank to take
necessary actions to minimise the possibility of account becoming non- performing asset
(NPA). Post sanction follow up and completing all documentation process is essential to
secure lenders interest. Further banks should proactively ensure that performance level
of borrower is in line with the projection made. The lender should constantly monitor and
ensure that the end use of funds is for the purpose lent.

i. Monitoring activities
The following are some of the monitoring activities.
 Monitoring the operations of OD/ OCC accounts to check whether the company is
doing the transaction relevant to the activity undertaken, whether the company is
paying to the suppliers of inputs in time, whether any dishonour of cheques issued
and frequency of such dishonor, etc.
 Monitoring all the debits of funds transferred
 Calling for periodical MIS from the company and scrutinising the same
 Conducting stock audit and follow up stock audit observations
 Collecting a certificate from the borrower to the effect that the funds are used for
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the purpose lent and not diverted

 Conducting unit inspection on rotation basis by all the members of JLA

ii. Monitoring of corporate loans through periodical returns

The following reports are to be called for and verified to assess whether the progress of
activities of the company is in line/tune with the projections made at the time credit
assessment.
 Stock and Book Debt Statement duly authenticated by Chartered Accountant
should be verified and the drawing power should be fixed and allowed
accordingly.
 All manufacturing concerns should submit Monthly Select Operational Data
(MSOD)
 Quarterly Information System (QIS) is to be submitted by the borrower enjoying a
credit limit of Rs. one crore and above working capital limit.

iii. Monitoring through Consortium Meeting

Consortium meetings are conducted for reviewing the corporate loans extended by JLA. The
participating banks can thrash out problems faced and address the issues. Generally, the
consortium meeting are conducted once in a quarter. If warranted, the same can be
conducted more frequently also. The minutes of the meeting are circulated to all the
members and remedial measures suggested are to be initiated wherever necessary.

The borrower company will present the current status in terms of production, sale and
level of achievement of milestone in relation to the projection given. In the meeting, the
members will discuss in detail all the issues including pending compliance as per terms of
sanction like security creation, exchange of selected and critical information among the
members.

The consortium members will have face to face dialogue with the borrower company on
various issues and share the genuine problems faced by the borrowing company across the
table and try to solve or give solutions in consultation with their respective controlling
authorities.

At times, the request of the company for adhoc fund based / non fund based credit limits
required if any are also taken up and the member banks refer the same to their respective
authorities for consideration.

The inspecting officials of the banks go through the minutes of all the consortium
meetings conducted in the year and pass critical comments if any in case the action points
are not carried out.

In short, regular and well planned consortium meets result in effective monitoring of the
loans granted and ensures that the borrower company is strictly put under pressure for
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proper track / end use of borrowed funds and the projected financial milestones are
reached as committed.

iv. Monitoring under Consortium /Multiple Banking Arrangement

Various regulatory prescriptions regarding conduct of consortium / multiple banking /
syndicate arrangements were withdrawn by Reserve Bank of India in October 1996 with
a view to introducing flexibility in the credit delivery system and to facilitate smooth flow
of credit. However, Central Vigilance Commission, Government of India, in the light of
frauds involving consortium / multiple banking arrangements, has expressed concerns
on the working of Consortium Lending and Multiple Banking Arrangements in the
banking system. The Commission has attributed the incidence of frauds mainly to the lack
of effective sharing of information about the credit history and the conduct of the account
of the borrowers among various banks.
Banks are encouraged to strengthen their information back-up about the borrowers
enjoying credit facilities from multiple banks as under:
(i) At the time of granting fresh facilities, banks may obtain declaration from the
borrowers about the credit facilities already enjoyed by them from other banks in the
format prescribed. In the case of existing lenders, all the banks may seek a declaration from their
existing borrowers availing sanctioned limits of Rupees five crore and above or wherever, it is in
their knowledge that their borrowers are availing credit facilities from other banks and introduce
a system of exchange of information with other banks as indicated above.
(ii) Subsequently, banks should exchange information about the conduct of the
borrowers' accounts with other banks as per the format prescribed at least at quarterly
intervals.
(iii) Banks should obtain regular certification by a professional, preferably a Company
Secretary, Chartered Accountant or Cost Accountant, regarding compliance of various
statutory prescriptions that are in vogue,
(iv) Banks should make greater use of credit reports available from a credit information
company which has obtained Certificate or Registration from RBI and of which the bank is a
member.
(v) The banks should incorporate suitable clauses in the loan agreements in future (at the
time of next renewal in the case of existing facilities) regarding exchange of credit
information so as to address confidentiality issues.
Lending banks should strictly adhere to the instructions regarding sharing of information
relating to credit, derivatives and unhedged foreign currency exposures among
themselves and put in place an effective mechanism for information sharing. Any sanction of
fresh loans / ad hoc loans / renewal of loans to new / existing borrowers should be done
only after obtaining / sharing necessary information.

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