A REPORT ON SUMMER INTERNSHIP AT FEDERAL BANK

-Effect And Impact Of Credit Monitoring In The Financial Performance Of Federal

bank

Summer Internship Report Submitted to

MANIPAL ACADEMY OF HIGHER EDUCATION – DUBAI CAMPUS

In Partial Fulfillment of the Requirement for the Degree of

MASTERS OF BUSINESS ADMINISTRATION

By

NAME: KRISHNA ANILKUMAR

REG. NO: 1812147

Under the Guidance and Supervision of

Dr. RAJESH PAI

SCHOOL OF BUSINESS
MANIPAL UNIVERSITY – DUBAI CAMPUS
ACADEMIC CITY, DUBAI, U.A.E.

APRIL 2019

1
DR.RAJESH PAI
Head of Department
School of Business
Manipal Academy of Higher Education – Dubai Campus
Academic City, Dubai, U.A.E.

Date: ………… 2019

CERTIFICATE

This is to certify that the summer internship report entitled, ‘A REPORT ON SUMMER
INTERNSHIP AT FEDERAL BANK’, submitted to the MANIPAL ACADEMY OF
HIGHER EDUCATION – DUBAI CAMPUS for the award of the degree of Masters of Business
Administration, is a record of the original work done by KRISHNA ANILKUMAR during the
period of her study in the School of Business, Manipal University - Dubai Campus, UAE, under
my supervision and guidance, and the internship report has not previously formed the basis for the
award of any degree, diploma, fellowship, associate ship or any other similar title, to any candidate
of any University.

Signature of the Guide

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ON THE COMPANY’S LETTERHEAD

CERTIFICATE

This is to certify that KRISHNA ANILKUMAR, a student of Master of Business Administration,

School of Business, Manipal Academy of Higher Education – Dubai Campus, bearing Registration
No 181214, has undertaken the Summer Internship Training at FEDERAL BANK during JULY
1 to AUGUST 30under my supervision & guidance. She has conducted a study & completed the
Project on 30th August.

Signature of the Guide

Name of the Guide: SREEJA S
Designation: Manager
Address: Federal Bank Ltd
Credit Monitoring Department,
Head Office- Aluva

Seal of Organization

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 DECLARATION

I hereby declare that matter embodied in this report entitled ‘A REPORT ON SUMMER
INTERNSHIP AT FEDERAL BANK’ is the result of the analysis of observations and interviews
carried out by me under the guidance of Dr.RAJESH PAI, School of Business, Manipal Academy
of Higher Education - Dubai Campus, UAE. This internship report has not previously formed the
basis for the award of any degree, diploma, fellowship, associate ship or any other similar title, to
any candidate of any University.

NAME: KRISHNA ANILKUMAR

REG. NO: 1812147

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 ACKNOWLEDGEMENT

My sincere thanks and acknowledgements are due to Dr. Kota Reddy, Academic
President,Manipal Academy of Higher Education, Dubai and Dr. Jason Fitzsimmons, Dean-
Corporate Executive Education and Chairperson-School of Business for providing me the
opportunity to pursue Summer Internship Project at Federal Bank Ltd, a leading among the
banking industry.

I am grateful to Ms. Sreeja S, Manager –Federal Bank Head Office CRMD,Ms.Asha N - Deputy
Vice President CRMD Head Office, Mr.Presannakumar N -Vice President And Head Of CRMD
and Mr.VineethVijayan – Assistant Manager of HR department Federal Bank for granting me
the permission,support, guidance and motivation throughout this internship.

My sincere thanks and gratitude are due to Dr. Rajesh Pie, Head of the Department, School of
Business for being a mentor and guide for this internship, for her valuable guidance with reviewing
and recommending improvements to this report. Am also thankful to many others, who directly or
indirectly contributed to the development of this work and who influenced my thinking, behavior
and acts during this study.

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EXECUTIVE SUMMARY

The 3-months Summer Internship Program at FEDERAL BANK is a part of the 2-year MBA
Course IN MANIPAL ACADEMY. Since the majority of the students come without any prior
work experience, the Summer Internship adds worth to their CVs by giving each student an
immense learning.
At Federal Bank, a student can bag an internship through various means since the institute gives
us ample opportunities to interact with industry experts. Initially I started with an organizational
study then moved to the specific aspects of credit monitoring department. Ms.Sreeja S, manager
of CRMD helped in doing the project by providing me sufficient information..

Mainly the project is all about credit and its monitoring. A credit is a lending of money by one or
more individuals, organizations, or other entities to other individuals, organizations etc. The
recipient incurs a debt, and is usually liable to pay interest on that debt until it is repaid, and also
to repay the principal amount borrowed. The extension of money from a bank to another party
with the agreement that the money will be repaid.

To monitor the loans and ensure timely disbursement of loans every bank will be having a credit
monitoring department. Reserve Bank Of India has its Framework for dealing with loan frauds.
The objective of the framework is to direct the focus of banks on the aspects relating to prevention,
early detection, prompt reporting to the RBI (for system level aggregation, monitoring &
dissemination) and the investigative agencies (for instituting criminal proceedings against the
fraudulent borrowers) and timely initiation of the staff accountability proceedings (for determining
negligence or connivance, if any) while ensuring that the normal conduct of business of the banks
and their risk taking ability is not adversely impacted and no new and onerous responsibilities are
placed on the banks. In order to achieve this objective, the framework has stipulated timelines with
the action incumbent on a bank. The timelines / stage wise actions in the loan life-cycle are
expected to compress the total time taken by a bank to identify a fraud and aid more effective
action by the law enforcement agencies. The early detection of Fraud and the necessary corrective
action are important to reduce the quantum of loss which the continuance of the Fraud may entail.

Credits are monitored by identifying Early Warning Signals (EWS) and Red Flagged Accounts
(RFA).A Red Flagged Account (RFA) is one where a suspicion of fraudulent activity is thrown up
by the presence of one or more Early Warning Signals (EWS). These signals in a loan account
should immediately put the bank on alert regarding a weakness or wrongdoing which may
ultimately turn out to be fraudulent. A bank cannot afford to ignore such EWS but must instead
use them as a trigger to launch a detailed investigation into an RFA. More details about EWS are
added in the following part of the project report.

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 TABLE OF CONTENTS

Chapter No Description Page No

1. Introduction 8
1.1 Need for the Study 9
1.2 Objectives of the Study 9
2 Industry Profile 11-13
3 Organizational Profile 14-22
4 Research Methodology 23-24
5 Analysis and Interpretation 25
5.1 Financial results of Federal 25
bank
5.2 Comparison of financial 27
results with IOB and HDFC
5.3 NPA 33
5.31 Strategies of managing NPA 37
by IOB and HDFC
5.4 Loans Focused By CRMD 38
5.41 Working Capital Demand 44
Loan
5.42 Working Capital Term Loan 46
5.5 Loan Procedure 47
5.6 Risk Management 51
5.7 Credit Monitoring 56
5.71 SMA and watch list account 57
5.72 EWS 58
5.73 Credit supervision and 61
management
5.74 End Use Of Funds 65
5.8 Tools of Credit monitoring 66
5.81 Working Capital Account 66
tools
5.82 Term loan tools 75
5.83 Non Fund based 78
5.84 Newly Opened Term Loan 87
5.85 Newly opened ODDC’s 88
5.9 One Time Settlement For 89
Standard Assets
6 Learning from the Internship 90
6.1 Asset Quality Protection 93
7 Conclusion 96
8 Reference 97

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1. INTRODUCTION

This is the project report of an internship in federal bank ltd as the part of SIP program in
MANIPAL UNIVERSITY DUBAI. As I had taken my specialization as FINANCE and
OPERATIONS I selected banking sector to do the internship. FEDERAL BANK will be and is
the right option as it is one of the reputed banks in India among the private sector banks. An
internship is a form of experiential learning that integrates knowledge and theory learned in the
classroom with practical application and skills development in a professional setting. Internships
give the opportunity to gain valuable applied experience and make connections in professional
fields they are considering for career paths; and give employers the opportunity to guide and
evaluate talent. This will provide students with practical experience in an organizational setting. It
helped me to improve my skills; develop my professional attitudes and competence in the
application of learned theories and concepts.

Federal Bank Limited is a major Indian commercial bank in the private sector headquartered at
Aluva. The department in which I am doing an internship is Credit Monitoring Department
(CRMD). CRMD monitors advances to ensure the timely repayment of credits. Credit monitoring
aims at ensuring compliance of terms of pre-disbursement conditions, keeping documents legally
enforceable, end use of funds as per the loan agreement to prevent diversion of bank funds, security
offered to the bank. Bank has put in place an effective post-sanction process to facilitate efficient
and effective credit management and to maintain a high level of standard assets. Credit Monitoring
is an integral part of lending activity.

Nearly all bank loans are made at interest, meaning borrowers pay a certain percentage of the
principal amount to the lender as compensation for borrowing. Lenders should ensure timely
disbursement of loans sanctioned in conformity with the terms and conditions governing such
sanction. Lenders should give notice of any change in the terms and conditions including interest
rates, service charges etc. Lenders should also ensure that changes in interest rates and charges are
effected only prospectively.
Before taking a decision to recall / accelerate payment or performance under the agreement or
seeking additional securities, lenders should give notice to borrowers, as specified in the loan
agreement or a reasonable period, if no such condition exists in the loan agreement. Lenders should
release all securities on receiving payment of loan or realization of loan subject to any legitimate
right or lien for any other claim lenders may have against borrowers. If such right of set off is to
be exercised, borrowers shall be given notice about the same with full particulars about the
remaining claims and the documents under which lenders are entitled to retain the securities till
the relevant claim is settled/paid. To monitor the loans and to ensure timely repayment a credit
monitoring is required. Credit monitoring and its importance are explained in detail in the further
part of report and it is the main focus of this internship.

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I am glad that I have the well experienced people in the department to guide me in internship. The
two months of internship gave a good experience for me to interact with industrial experts, to learn
new terms related to bank, to enhance my skills in finance field etc.

1.1. NEED FOR STUDY

Internship is a great opportunity to combine theoretical knowledge gained in the classroom with
practical application in professional work setting, thereby acquiring new knowledge and validating
current knowledge through feedback process resulting from such practical implementation. While
it helps in networking with professionals across organizations for students in search of a career,
for working professionals it offers opportunity to validate and connect theoretical knowledge with
existing experience to gain new experience, competencies and skills by learning across business
functions.

To earn a practical knowledge in finance field is the need of this internship at FEDERAL bank
during 1st July to 30th August. This internship work done extended to marketing as well as
operations field.

1.2 OBJECTIVE OF PROJECT:

As per the RBI regulations regarding the framework for avoiding bank frauds in lending, federal
Bank is having a framework for credit monitoring, supervision followed by proper management.
Objective for the project is to analyze the effectiveness of this framework.

● What are the effects and impacts of credit monitoring in the financial performance of
Federal Bank?
● Effect And Impact Of Credit Monitoring In The Financial Performance Of Federal Bank

PRIMARY OBJECTIVE:

Understanding of tools and aspects in credit monitoring by having an internship in the concerned
department.

● “EFFECT AND IMPACT OF CREDIT MONITORING IN THE FINANCIAL

PERFORMANCE OF FEDERAL BANK”
That is how credit monitoring department function reflects in the financial performance of Federal
Bank. For this financial result, Investors presentation, were analyzed and evaluated the
NPA position and growth in advances as well the overall profit of the bank.
● “TOOLS AND STRATEGIES USED BY BANKS FOR CREDIT MONITORING
AND MANAGEMENT”

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The major tools used by credit monitoring department to monitor the advances and manage NPA
and how effectively each tools contribute in credit monitoring were learned.

SECONDARY OBJECTIVE:

Analysis of financial results of bank and conducting a comparative study with competitive banks.
Hence having a study about the effectiveness and impact of credit monitoring in Federal Bank.
Federal bank is one among the private sector bank. Comparing the organization with its
competitors will enable to evaluate the position and effectiveness of its functioning. The banks
chosen for comparison are HDFC, one among private sector bank, and IOB, one among public
sector bank. Financial results of each bank were compared on the basis of their profitability and
asset quality.

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2. PRIVATE BANKING INDUSTRY PROFILE

A bank is a commercial or state institution that provides financial services, including issuing
money in the form of coins, banknotes or debit cards, receiving deposits of money, lending money
and processing transactions. A commercial bank accepts deposits from customers and in turn
makes loans based on those deposits. Some banks issue banknotes as legal tender. Many banks
offer ancillary financial services to make additional profit. A commercial bank is usually defined
as an institution that both accepts deposits and makes loans; there are also financial institutions
that provide selected banking services without meeting the legal definition of a bank.

Finance and banking is the life blood of trade, commerce and industry. Now-days, banking sector
acts as the backbone of modern business. Development of any country mainly depends upon the
banking system. A bank is a financial institution which deals with deposits and advances and other
related services. It receives money from those who want to save in the form of deposits and it lends
money to those who need it. The banking is one of the most essential and important parts of the
human life. In current faster lifestyle peoples may not do proper transitions without developing the
proper bank network.

Banking industry comprises banks that operate across the world and operate by providing different
types of banking services to customers. The business of a bank and any financial institution
functions with the trade, exchange, depositing, loaning and many other finance related activities,
for example- activities such as holding money in saving, creating and checking accounts, issuing
loans and credit and many other transactional activities that involves the customer and the bank.
Basically, a bank is a financial intermediary. Globally there are several different types of banks
that engage in different types of banking, few of them are advising bank, central bank, state bank,
commercial bank, credit union and investment bank. Banks are governed by a central government
body and within permissible regulations; banks can offer legal personal and commercial services
to clients.

Banking industry is a highly regulated by the government. Basic and regular routine banking
activities include paying on checks written by clients, collecting deposits and issuing loans. The
main source of revenue is generated through issuing loans, and charging interest on loans. Since
the advanced processes and improvements in technology, there are many banking channels which
clients use to access accounts and conduct their businesses and transactions, some of them are,
bank teller at the branch, call center or telephone banking, online or mobile banking, video banking
and ATM machines.

The private-sector banks in India represent part of the Indian banking sector that is made up of
both private and public sector banks. The "private-sector banks" are banks where greater parts of
stake or equity are held by private shareholders and not by the government. Banking in India has
been dominated by public sector banks since 1969 when all major banks were nationalized by the
Indian government. However since liberalization in government banking policy in the 1990s, old

11
and new private sector banks have re-emerged. They have grown faster and bigger over the two
decades since liberalization using the latest technology, providing contemporary innovations and
monetary tools and techniques. The private sector banks are split into two groups by financial
regulators in India, old and new. The old private sector banks existed prior to the nationalization
in 1969 and kept their independence because they were either too small or specialist to be included
in nationalization. The new private sector banks are those that have gained their banking license
since the liberalization in the 1990s.

The Government has taken this sector in a basic priority and this service sector has been changed
according to the need of present days. Banking sector reforms in India Strive to increase efficiency
and profitability of the banking institutions as well as brought the existing banking institutions face
to face with global competition in globalization process. Different type of banks differs from each
other in terms of operations, efficiency, productivity, profitability and credit efficiency. Indian
banking sector is an important constituent of the Indian Financial System. The banking sector plays
a vital role through promoting business in urban as well as rural areas in recent years, without a
sound and effective banking system, India cannot be considered as a healthy economy.

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SWOT ANALYSIS OF BANKING INDUSTRY

Strength

❖ One of the oldest industries

❖ A leader in economic growth
❖ Financial support after a crisis
❖ Digital banking convenience

Weakness

❖ Lack of worldwide coordination

❖ Old technology lead to vulnerabilities
❖ No access to rural area

Opportunity

❖ Move into rural regions

Threats

❖ The biggest threats of all; recession

❖ Data breaches
❖ So much competition

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3.ABOUT THE ORGANIZATION (FEDERAL BANK)

ABOUT THE BANK

✔ Federal Bank Limited is a major Indian commercial bank in the private sector
headquartered at Aluva, Kerala having more than thousand branches and ATMs spread
across different States in India.
✔ The Bank is a pioneer among traditional banks in India in the area of using technology to
leverage its operations and was among the first banks in India to computerize all its
branches.
✔ The Bank offers its customers a variety of services such as Internet banking, Mobile
banking, on-line bill payment, online fee collection, depository services, Cash
Management Services, merchant banking services, insurance, mutual fund products and
many more as part of its strategy to position itself as a financial super market and to
enhance customer convenience.

THE HISTORY OF FEDERAL BANK

✔ The Bank was incorporated on April 23, 1931 as Travancore Federal Bank Limited,
Nedumpuram under the Travancore Companies Regulation, 1916.
✔ Late K.P. Hormis, the visionary banker and founder took up the reigns in 1945 and built
the bank a nationwide institution.
✔ The Bank's name was changed to The Federal Bank Limited on December 2,1949.
✔ The Bank was licensed under the Banking Regulation Act, 1949, on July 11, 1959
✔ Became a scheduled commercial bank under the Second Schedule of the Reserve Bank of
India Act, 1934 on July 20, 1970.
✔ Today the bank is present in 25 States, Delhi NCT and 4 Union Territories and the bank is
listed in BSE, NSE and London Stock Exchange.

VISION:

To be the ‘Most Admired Bank' which is digitally enabled with a sharp focus on Micro, Medium
and Middle market enterprises.

MISSION:

Devote balanced attention to the interests and expectations of stakeholders, and in particular:

Shareholders: Achieve a consistent annual post-tax return of 18% on net worth.

Employees: Develop in every employee a high degree of pride and loyalty in serving the Bank.

14
Customers: Meet and even exceed the expectations of target customers by delivering appropriate
products and services, employing as far as feasible, single window and 24-hour-seven-day-week
concepts, leveraging a strengthened branch infrastructure, ATMs, other alternative distribution
channels, cross-selling a range of products and services to meet customer needs varying over time,
and ensuring the highest standards of service at all times, guided by our principle of being 'Digital
at the fore, human at the core'.

FACILITIES AND SERVICES OFFERED BY THE BANK

Federal bank offer services for personal, NRI as well as business. Services offered include:

⮚ DEPOSITS
⮚ LOANS
⮚ DIGITAL PRODUCTS
⮚ CREDIT CARD & DEBIT CARD FACILITIES
⮚ INVESTMENT AND INSURANCE

DEPOSITS:

Ways to invest your surplus funds. Variety of our deposit schemes that can yield a fair
profit. Unlike investment in the stock markets, term deposits are not a risky investment as they do
not depend on fluctuating market rates.

TYPES OF DEPOSITS OFFERED:

PERSONAL: NRI: BUSINESS:

⮚ Fixed Deposit ⮚ NRI Fixed Deposit ⮚ Fixed Deposit

⮚ Cash Certificate ⮚ Millionaire ⮚ Cash Certificate

Deposits

⮚ Tax Saving Deposit ⮚ FCNR Deposits ⮚ Recurring Deposit

⮚ Recurring Deposit ⮚ Federal Rupee Plus

⮚ Millionaire Deposit ⮚ Fed Flexi Smart

Saver RD

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ACCOUNTS:

PERSONAL NRI BUSINESS

⮚ Saving account ⮚ NRE Savings ⮚ Current Accounts

Accounts

⮚ NRO Savings ⮚ EEFC Accounts

⮚ Salary Accounts

⮚ Noor-personal ⮚ NRE Current ⮚ Gift Accounts

account Accounts

⮚ NRO Current
⮚ RFC account Accounts

⮚ NRI Priority
⮚ GBD SUPER S1 - Banking
for PSUs and
Government
Departments

⮚ Demat accounts

⮚ Demat accounts: The instademat account facility will help clients open demat accounts
instantly so that they can start using the same for various purposes such as application for
an IPO (initial public offering) or NFO (new fund offer), trading, etc.

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LOANS:

PERSONAL NRI

⮚ Gold Loan ⮚ NRI Gold Loan

⮚ NRI Car Loan

⮚ Housing Loan

⮚ NRI Housing
⮚ Car Loan Loan

⮚ NRI Property
⮚ Property Loan Loan

⮚ Education & Career ⮚ Other Loans For

Loan NRI

⮚ Other Loan

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BUSINESS:

SME & AGRI LOANS COMMERCIAL LOANS TRADE FINANCE

⮚ SME Business ⮚ Term Loan ⮚ Bank Guarantee

Loans

⮚ Agri Loans ⮚ Project Finance ⮚ LC Bill

Discounting

⮚ Agri Allied ⮚ Bill Discounting ⮚ Export Pre-

Loans Shipment Credit

⮚ Instant Digital ⮚ Working Capital ⮚ Export Post-

Loan Loans Shipment Credit

⮚ Loan against ⮚ Bank Guarantee ⮚ Merchant

Fixed Deposits for Corporates Banking Services

``
(BLANK) ⮚ Letter of Credit ⮚ Cash
Management
Services

(BLANK) ⮚ Packing Credit

Limit

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(BLANK) ⮚ PCFC

(BLANK) ⮚ EBRD

CARDS

⮚ Credit Cards
Federal Bank offers you internationally accepted Credit cards co-branded with State Bank
of India, in association with VISA. You can use these cards in millions of POS terminals
as well as e-Commerce websites all over the world for shopping and other payments.

⮚ Personal Banking Debit Cards

Federal Bank offers you internationally accepted Debit Cards in association with
MASTERCARD and VISA. You can use these cards in millions of POS terminals all over
the world for shopping and withdrawal of cash from your account through any ATM in any
country, accepting MASTERCARD and VISA cards.

⮚ FeDelight Gift Card:FeDelight – Gift Cards from Federal Bank are perfect gifting
options for all occasions where you can give your loved ones the gift of choice.
⮚ Federal Bank Forex Card:

Federal Bank Forex Card, the ultimate foreign currency solution for our customers.
Now you can enjoy your dream holiday spots, dine out with your family and friends, and
forget the worries and hassles of converting currencies. With Forex Card, enjoy borderless
banking from Federal Bank. It is a prepaid, foreign currency Travel Money Card from
Federal Bank designed with the needs of the traveler and their destination in mind. The
card is Chip and PIN protected and can be used at over 30 million ATM's and Merchants
globally who display the MasterCard Acceptance Symbol (excludes use in India, Nepal
and Bhutan).

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INSURANCE AND INVESTMENT

⮚ Wealth Management: Federal Bank in association with Equirus Capital Pvt. Ltd. offers a
bouquet of comprehensive tailor-made wealth management solutions and best-in-class
products.

⮚ IDBI Federal Life Insurance:

Whether want to protect loved ones or save for your long term goals, federal bank provides
have a solution for you from IDBI Federal Life Insurance Co Ltd.

⮚ Family Floater Health Guard:

Bajaj Allianz's Family Floater Health Guard Policy is the perfect health protection
for one and their family. It takes care of the expensive medical treatment incurred during
hospitalization resulting from serious accidents or illnesses. The policy covers pre and post
hospitalization expenses and also ambulance charges in case of an emergency (subject to a
limit of Rs.1000/-).

⮚ General Insurance:

Protect family future through the varied range of insurance products from Bajaj Allianz

⮚ Fed-e-Trade (Online Share Trading):

Federal Bank offers Fed-e-Trade - a feature packed 3-in-1 Account. A Savings and Demat
Account with us and a Trading Account with M/s Geojit Financial Services Ltd.

DIGITAL PRODUCTS

⮚ Mobile Banking - Fed Mobile:

FedMobile App is the mobile banking App offered by Federal Bank. FedMobile offers
over 100+ banking features and services to take care of your banking requirements. From
paying utility bills, school fee, mobile/DTH recharges to investment in mutual Funds/
Insurance and a lot more can be done conveniently from anywhere, anytime from your
smartphone.
⮚ Lotza BHIM UPI

Got different Bank accounts? Use Lotza BHIM UPI which bundles all your bank
accounts in a single App. Now let's bank the Lotza BHIM UPI way. Banking now more
secured through Lotza BHIM UPI. Link different Bank accounts to a single app for your
banking requirements. Lotza BHIM UPI is one of the few UPI (Unified Payment Interface)
PSP App to be approved by National Payments Corp. of India Ltd (NPCI).

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 FedBook Selfie

Gone are the days when you needed to visit your Bank to update your passbook.
Federal Bank introduces FedBook - a convenient and secure mobile app to get your
Account passbook on your smartphone. Though, we are more than happy to serve you at
our branch, we believe that your time is as valuable as your money. Unlike any other
banking application, you need not fill in any application form- Just download FedBook app
and start using it!
⮚ SMS Banking

Federal Bank provides you the finest SMS Banking experience- access your bank
account details at your fingertips. It is all about sending SMS to know your account details
and to avail a host of value added services offered by your bank. For availing SMS
Banking, you do not need smartphone or GPRS connectivity. It is available in any handset
⮚ Missed Call Based Banking Services

Experience and unleash the power of a Missed call! Now you can avail a host of
banking services by just giving us a missed call - yes, experience the power of banking
technology at your fingertips. Federal Bank has introduced a handful of services which you
can avail through Missed Call Banking. You can know the balance of your account(s), get
mini statement, top up your mobile and even make fund transfers.
⮚ Corporate FedMobile

FedCorp is our Mobile Banking application that caters to transactional needs of our
SME and Corporate customers. Using this application, a business entity can manage
banking transactions at their convenience without visiting the Bank. This
convenient and secure app helps to access their accounts, view balances, Funds
Transfers (Intra Bank, NEFT & IMPS), manage beneficiaries and much more. This
is a 24X7 service which can be accessed anywhere anytime. The app is having so
many exciting features like paperless current account process for better smoothing
of business transactions with updated transaction limits.
● This service can be utilized by customer accounts under:
● Sole Proprietorship Firms
● Partnership Firms
● Public/Private Limited Companies
● Societies
● Trust
● Associations
21
⮚ Corporate Fednet
Now corporate banking can be done from office. Business rules can be set as per
requirement. Limits can be set as required. Officials can be given authority to make funds
transfer and authorize / approve transactions. All can access their Company's Bank
Statements from the comfort of their office and make soft or hard copies as please making
bank reconciliation all the more easy. Corporate banking has never been this convenient.

22
4.RESEARCH METHODOLOGY

OBJECTIVE OF PROJECT:

As per the RBI regulations regarding the framework for avoiding bank frauds in lending, federal
Bank is having a framework for credit monitoring, supervision followed by proper management.
Objective for the project is to analyze the effectiveness of this framework.

● What are the effects and impacts of credit monitoring in the financial performance of
Federal Bank?
● Effect And Impact Of Credit Monitoring In The Financial Performance Of Federal bank

PRIMARY OBJECTIVE:
Understanding of tools and aspects in credit monitoring by having an internship in the concerned
department.

● “EFFECT AND IMPACT OF CREDIT MONITORING IN THE FINANCIAL

PERFORMANCE OF FEDERAL BANK”
That is how credit monitoring department function reflects in the financial performance of Federal
Bank. For this financial result, Investors presentation, were analyzed and evaluated the
NPA position and growth in advances as well the overall profit of the bank.
● “TOOLS AND STRATEGIES USED BY BANKS FOR CREDIT MONITORING
AND MANAGEMENT”
The major tools used by credit monitoring department to monitor the advances and manage NPA
and how effectively each tools contribute in credit monitoring were learned.

SECONDARY OBJECTIVE: Analysis of financial result of bank and conducting a comparative

study with competitive banks. Hence having a study about the effectiveness and impact of credit
monitoring in Federal Bank.

“FINANCIAL RESULT OF BANK AND COMPARE IT AMONG PRIVATE SECTOR

AND WITH PUBLIC SECTOR BANKS.”
Federal bank is one among the private sector bank. Comparing the organization with its
competitors will enable to evaluate the position and effectiveness of its functioning. The banks
chosen for comparison are HDFC, one among private sector bank, and IOB, one among public
sector bank. Financial results of each banks were compared on the basis of their profitability and
asset quality.

23
DATA COLLECTION METHODS

Data required for the project is internally collected by doing an internship in Credit Monitoring
Dept. of bank.
Secondary data were collected by a study of terminologies regarding credit monitoring, in detail
and depth of its terms and process with the help of different websites including banks personal
website, RBI website etc. (ref page no103)
LIMITATIONS OF STUDY

The summer internship involved stretching across different business functions. Being part of a
major multinational organization, most of the operations conducting in the department included
with confidential customer as well as business information’s. Even though the tools and strategies
were familiarized, there are limitations for direct application and further study.

TIME OF RESEARCH

The internship was conducted during 2019 July to August, so all the data collected (financial
statement, balance sheet) were during the quarter of 2019. As data such as profit, NPA position
etc. are changing quarterly it can be a limitation.

TYPE OF DATAS COLLECTION

The data collected for internship is mainly through observing and studying the activities of credit
monitoring department of the bank. However there are data which were collected from secondary
sources. As a secondary data is already gathered and interpreted data by someone else, the data
may be out of date or inaccurate. This can be a limitation of study.

24
5.ANALYSIS AND INTERPRETATIONS

5.1 FINANCIAL RESULT OF FEDERAL BANK FY19 (QUARTER 4)

India is a developing nation and is growing at a commendable rate as compared to other economies.
Though India has a respectable position in terms of financial stability at the global level, still its
banks are suffering from the menace of ever increasing Non Performing Assets i.e. NPA.
Technically NPAs are loans in which borrower has not paid neither interest nor principal for at
least ninety days. In India Public sector banks are more highly affected due to NPA. They have to
render loans to borrowers in order to facilitate economic development agenda of the government.
This results in willful defaulters who try to delay the repayment as long as they can by misusing
the provisions of law in their favour.
NPAs have repercussions on the bank’s financial statements. Moreover, a weak banking system
reduces the investor’s confidence on the Indian market. Depositors do not get proper returns and
in extreme scenarios can also lose their uninsured deposits.
Banks have to be slightly more conscious and strict while lending loans. They should focus on
selection of right borrowers and their ability for timely payments, so as to minimize the chances
of new NPAs. The policy makers and regulators should be in line to assist banks in getting rid of
NPAs. The proposed Bankruptcy code will shorten the timelines for resolution and recovery in
case of insolvency. It’s true that banks can’t get rid of NPAs in an overnight. It is a gradual process.
However, dedicated commitment by the banks, RBI, and government will definitely clean up their
balance sheets.
Following is an analysis of NPA position of Federal bank and competitive banks for FY19. On the
basis of this analysis, project objective has been derived.

25
FINANCIAL RESULT OF FEDERAL BANK FY19 (QUARTER 4):- INVESTORS
PRESENTATION

OPERATING PROFITGROSS NPA NET NPAADVANCE

755CR 3.0% 1.69% 20.02%

589CR 28% 2.92% 1.48%

Q418 Q419 Q419

Q418 Q419 Q418 Q419 Q418 Q419

PROFITABILITY

The operating performance continues to be robust and the Bank reported the highest ever
Operating Profit of 755 Cr increased by 28%. Net Profit of your bank is up by 41.54% to ` 1243.89
Cr. The total business of the Bank stood at ` 2,45,177 Cr for the year ended 31st March 2019.
Healthy traction in core income streams has helped Bank to have a good momentum in core
operating performance. Net Interest Income improved by 16.57% to ` 4176.35 Cr. Total income
of Bank during the fiscal year 2019 recorded 17.03% growth to reach ` 12770.05 Cr. The yield on
advances stood at 9.24% and the yield on Investments at 7.47 %. The Net Interest Margin for the
fiscal year is at 3.14% as against 3.21%, in the previous year. The current Market share is 105.45.

ASSET QUALITY
Asset Quality of the franchise showed marked progress and the Bank recorded highest ever
Recovery/Upgrades of 965 Cr and along with a significant reduction in slippages, it resulted in the
Gross NPA and Net NPA improving to 2.92% and 1.48% respectively. Provision Coverage Ratio
to 67.16%.

26
5.2 FEDERALBANK FINANCIAL RESULTS- A COMPARISON WITH OTHER
BANKS (HDFC AND IOB)

The financial results FYI9 of two banks are taken, one from public and one from the private sector
to make a comparison with financial result FY19 of FEDERAL BANK. The Banks chosen are
HDFC (private sector) and IOB (public sector).

COMPARISON OF DATAS OF QY19 WITH QY18 OF FEDERAL BANK .HDFC BANK,

AND IOB

OPERATING PROFIT:

INDIAN OVERSEAS BANK FEDERAL BANK HDFC BANK

5034CR 755CR 58851

3629CR 38.71% 589CR 28% 47993 22.6%

Q418 Q419 Q418 Q419

Q418 Q419

OBSERVATIONS:

⮚ All the three banks have significant increase in operating profit in Q4 FY19 as compared
to Q4FY18
⮚ Among the three banks the IOB shows much significant increase as compared to the other
two banks.
⮚ Increase in profit of IOB, FEDERAL BANK and HDFC bank are 38.71%, 28% and 22.6%
respectively.
⮚ FEDERAL BANK’s increase in operating profit is less as compared to IOB but greater as
compared with HDFC bank.

27
GROSS NPA:

INDIAN OVERSEAS BANK FEDERAL BANK HDFC BANK

25.28% 3.0% 1.36%

21.97% 2.92% 1.30%

Q418 Q419
Q418 Q419 Q418 Q419 Q418 Q419

OBSERVATIONS:

⮚ Gross NPA of IOB and FEDERAL BANK is decreasing which is beneficial for the bank
but GNPA of HDFC is increasing which might be the reason for its small increase in profit
as compared with other banks.
⮚ GNPA of IOB shows a good decrease with 21.97% in Q4FY19 as compared to last
financial year.
⮚ GNPA of FEDERAL BANK shows a decrease with 2.92% in Q4FY19 as compared to last
financial year.
⮚ GNPA of HDFC shows an increase with 1.36% in Q4FY19 as compared to last financial
year.
⮚ FEDERAL BANK could able to decrease/manage its GNPA in an effective way as
compared with HDFC bank.
⮚ The decrease in GNPA is more significant for IOB than FEDERAL BANK.

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NET NPA

INDIAN OVERSEAS BANK FEDERAL BANK HDFC BANK

15.33% 1.69% 0.40%

10.81% 1.48% 0.39%

Q418 Q419 Q418

Q418 Q419
Q419 Q418 Q419

OBSERVATIONS:

⮚ Net NPA of IOB and FEDERAL BANK is decreasing which is beneficial for the bank but
NPA of HDFC is increasing which might be the reason for its ‘small’ increase in profit as
compared with other banks.
⮚ Net NPA of IOB shows a good decrease with 10.81% in Q4FY19 as compared to last
financial year.
⮚ Net NPA of FEDERAL BANK shows a decrease with 1.48% in Q4FY19 as compared to
last financial year.
⮚ Net NPA of HDFC shows an increase with 0.40% in Q4FY19 as compared to last financial
year.
⮚ FEDERAL BANK could able to decrease/manage its Net NPA in an effective way as
compared with HDFC bank.
⮚ The decrease in Net NPA is more significant for IOB than FEDERAL BANK.

29
ADVANCES

INDIAN OVERSEAS BANK FEDERAL BANK HDFC BANK

25.58% 20.02% 24.6%

OBSERVATIONS:

⮚ Advances of all the three banks are significantly increasing in Q4 FY19 as compared to
Q4FY18.
⮚ Increase in advances of IOB, FEDERAL BANK and HDFC bank is 25.58%, 20.02%,
24.6% respectively.
⮚ Increase in advances is more significant for IOB bank than the other two banks.
⮚ FEDERAL BANK shows a least increase in advance as compared to IOB and HDFC
bank.

30
COMPARISON OF FINANCIAL RESULTS OF BANKS (QY18 AND QY19):

Name Last Price Market Cap. Net Net Profit

(Rs. cr.) Interest
Income
HDFC BANK 2,402.15 656,462.50 98,972.05 21,078.14

FEDERAL BANK 105.45 20,942.18 11,419.03 1,243.89

IOB 12.20 11,152.81 17,631.27 -3,737.88

INDIAN OVERSEAS BANK:

PROFITABILITY:

The efforts during the current year were aimed at sustaining the higher operational efficiency
levels as the operating environment remained firm. As a result, the Bank improved its operating
profit which ended at Rs.5,034 crores in FY 2018-19 compared to Rs. 3,629 crores recorded in the
previous year. The higher provision requirements of Rs.8772 crores during the year forced the
Bank to report a Net Loss of Rs.3738 crores for the year. The Bank had reported Rs. 6,299 crores
of loss during 2017-18.Total advance of the bank stood at 25.58%.The current Market share of the
bank is 12.20.

ASSET QUALITY:
Focused attention was laid on Gross NPA reduction which decreased and ended at Rs. 33,398
crores or 21.97% for FY 2018-19 as against Rs. 38,180 crores in FY 2017-18.Net NPA reduction
which decreased and ended at 10.8%. Better NPA Management, Slippages lesser than Recovery
in Q4.

FEDERAL BANK:

PROFITABILITY

The operating performance continues to be robust and the Bank reported the highest ever
Operating Profit of 755 Cr increased by 28%. Net Profit of your bank is up by 41.54% to ` 1243.89
Cr. The total business of the Bank stood at ` 2,45,177 Cr for the year ended 31st March 2019.
Healthy traction in core income streams has helped Bank to have a good momentum in core
operating performance. Net Interest Income improved by 16.57% to ` 4176.35 Cr. Total income
of Bank during the fiscal year 2019 recorded 17.03% growth to reach ` 12770.05 Cr. The yield on
advances stood at 9.24% and the yield on Investments at 7.47 %. The Net Interest Margin for the
fiscal year is at 3.14% as against 3.21%, in the previous year. The current Market share is 105.45.

31
ASSET QUALITY
Asset Quality of the franchise showed marked progress and the Bank recorded highest ever
Recovery/Upgrades of 965 Cr and along with a significant reduction in slippages, it resulted in the
Gross NPA and Net NPA improving to 2.92% and 1.48% respectively. Provision Coverage Ratio
to 67.16%.

HDFC BANK:

PROFITABILITY:

Bank’s Net Profit at Rs. 21,078.1 crore went up by 20.5 per cent and its Operating profit advances
at 22.6% or 58851cr from 47993cr in FY18.Bank recorded an improvement in a majority of its
key financial parameters. At Rs. 48,243.2 crore, Net Interest Income rose by 20.3 per cent. Core
Net Interest Margin remained stable at 4.3 per cent. The yield on advances stood at 24.6% and
Deposits up by 17.0%. Core Net interest margin at 4.4%.The current market share of the bank is
2,402.15.

ASSET QUALITY:

Gross Non-Performing Assets (NPAs) at 1.36 percent is among the lowest in the industry. This
was largely due to the Bank’s prudent credit evaluation of the targeted customer profile and having
a diversified loan book spread across customer segments, products, and sectors plus managing
risk-return decisions with discipline.Net NPA shows an increase of 0.4%.

32
5.3 NPA-NON PERFORMING ASSETS

WHAT IS NPA?

❖Assets which produce salary are called performing assets and yet those don't create pay are
called non-performing assets.

❖A obligation commitment where the borrower has not paid any recently settled upon intrigue
and head reimbursements to the assigned loan specialist for an all-encompassing timeframe.

❖Nonperforming asset is along these lines not yielding any pay to the moneylender as head and
premium installments

❖For model, a home loan in default would be considered non-performing

❖After a drawn out time of non-installment, the loan specialist will compel the borrower to
exchange any assets that were vowed as a feature of the obligation understanding.

❖If no assets were swore, the banks may discount the asset as an awful obligation and afterward
offer it at a markdown to a debt enforcement office

❖Asset becomes non-performing when it stops to create salary for the bank.

❖A non-performing asset (NPA) is characterized for the most part as a credit office in regard of
which intrigue and/or portion of chief has stayed "past due" for two quarters or more.

❖An sum due under any acknowledge office is treated as "past due" when it has not been paid
inside 30 days from the due date.

WHY ASSETS BECOME NPA?

A few prominent reasons for assets becoming NPAs are as under:

 Lack of appropriate checking and follow-up measures.

 Lack of genuine corporate culture.
 Inadequate legitimate arrangements on dispossession and insolvency.
 Change in monetary approaches/condition.
 Non straightforward bookkeeping strategy and poor evaluating rehearses.
 Lack of coordination between banks/FIs.
 Directed arriving to specific parts.
 Failure with respect to the advertisers to get their segment of value from their very own
sources/open issue because of market turning negative.

33
 FACTORS RESPONSIBLE FOR NPA

Internal Factor

❖Diversion of assets for - Expansion/broadening/modernization

❖Taking up new undertaking

❖Helping/advancing partner concerns time/cost overwhelm during the undertaking execution

arrange

❖Business Failure

❖Inefficiency in the executives

❖Slackness in credit the executives and observing

❖Inappropriate Technology/specialized issue

❖Lack of coordination among moneylenders

External Factor

❖Recession

❖Input/power stockpiling

❖Price heightening

❖Exchange rate change

❖Accidents and characteristic cataclysms, and so forth.

❖Changes in government approaches in extract/import obligations, contamination control orders,

and so on.

BASIS FOR CLASSIFICATION

⮚ SMA-0 Principal or interest payment not overdue for more than 30 days but account
showing signs of incipient stress
⮚ SMA-1 Principal or interest payment overdue between 31-60 days
⮚ SMA-2 Principal or interest payment overdue between 61-90 days

34
NPA - IMPACT

⮚The issue of NPAs in the Indian financial framework is one of the premier and the most
impressive issues that affect the whole financial framework.

⮚Higher NPA proportion trembles the certainty of financial specialists, investors, banks and so
on.

⮚It likewise causes poor reusing of assets, which thus will have malicious impact on the
organization of credit.

⮚The non-recuperation of advances influences further accessibility of acknowledge as well as

money related adequacy of the banks.

5.31 STRATEGIES OF MANAGING NPA –IOB AND HDFC

STRATEGY OF MANAGING NPA – INDIAN OVERSEAS BANK

⮚ PSU lender Indian Overseas Bank (IOB), which has been facing a huge bad loans, managed
to cut its losses and reduce slippages in the first quarter of this fiscal.
⮚ In retail, banks NPAs have dropped drastically from 6 percent to less than 3 percent.
Sustained efforts on SARFAESI (The Securitization and Reconstruction of Financial
Assets and Enforcement of Securities) Act helped bank cut the bad loan size.
⮚ On the other hand, bank has been preventing further slippages. In the first quarter, net
accretion was only ₹355 crore of NPA. Now, the pace of recovery is higher than the pace
of slippages. Banks strategy of reducing slippage and increasing the recovery is working
well.
⮚ Credit growth: A structural change has been effected in micro and small-scale lending
segment. Now, every branch of IOB has to participate in two areas – micro and small loans.
In a week, each branch should get two each of micro and small loans.
⮚ Bank is now in the process of automating entire micro and small loan procedures.
⮚ In the recent quarter, Bank could able to touch 43 per cent as the priority sector lending.
This indicates that the participation of branches has increased significantly compared to
earlier.
⮚ Bank also wants to achieve quality credit growth. Hence, have told the branches to fetch
only four home loans and five vehicle loans a month. This reduces pressure on staff while
giving them sufficient time for due diligence.
⮚ All these are yielding results and retail disbursements are growing significantly. Objective
is to have a balanced credit portfolio with about 40 percent of the large corporate and 60
percent of other categories, which will be a good mix.
⮚ Indian Overseas Bank (IOB) has said it will turn around by reporting profits from the
second quarter of the 2019-20 financial years. The announcement comes against the

35
 backdrop of an increased number of branches reporting profit, a drop in new slippages and
a good pace of non-performing asset (NPA) recoveries, among other factors.
⮚ Operating profit has improved without much expansion in top line growth.
⮚ One of the key reasons for the fall in loss is profitability is performance at unit-level
branches. The number of loss-making branches, at 5.6 per cent of total 3,284 branches as
on March 16, 2019, is down from 21.1 percent of 3,397 branches as on December 31, 2018.
⮚ Fresh credit disbursement of the bank is to the extent of recovery. As such, the bank is able
to maintain its interest income, which risk-weight assets to advances stood at 83.06 per
cent and credit-risk-weight assets to advances ends at 64.26 per cent.
⮚ The bank is hopeful that it could bring down its NPAs in the next six months. Around 72
per cent of the NPA is under the corporate sector, of which recovery is expected from six
to seven accounts under the National Company Law Tribunal resolution to the extent.
⮚ On the other side, the bank has started controlling fresh slippages, which was around Rs
1,000 crore, against Rs 1,500-2,000 crore earlier. In the past two months alone, the bank
has managed to do cash recovery of Rs 1,000 crore.
⮚ NPA slippages have been continuously reduced and the bank has achieved the status of
high recovery than slippages at present.
⮚ Besides monitoring and strengthening in the field of recovery of NPAs, the bank used
technology in an effective way.
⮚ Strong NPA database with appropriate analytical tools integrated with
CBS(Core Banking Solution is networking of branches, which enables Customers to
operate their accounts, and avail banking services from any branch of the Bank on
CBS network, regardless of where he maintains his account) has helped the bank manage
the NPAs.
⮚ The entire OTS (One Time Settlement) process has been automated for standardized
compliance of non-discretionary and non-discriminatory OTS policy of the bank. This
doubled the number of OTS settlements in the current year over the previous year.
⮚ Focus on capital optimization and profit maximization: Bank has put in place a robust risk
management architecture with due focus on maximizing banks business operations that
will in turn maximize profit or return on equity. To enable a more efficient, equitable and
prudent allocation of resources, bank will benchmark its operations on globally accepted,
sound risk management systems.
⮚ To counter the impact of the NPAs on Bank’s financial position, Bank is following a multi-
pronged approach including creation of a robust follow up and recovery mechanism that is
monitored from the head office and the creation of specialized NPA recovery branches to
takeover high value NPAs from branches.
⮚ Further aim to improve productivity by creating a culture of cost control and cost
consciousness internally by striking an efficient and effective balance between people,
processes and technology through the optimal allocation and utilization of resources.

36
STRATEGY OF MANAGING NPA – HDFC BANK

⮚ In good times and bad, HDFC Bank sticks to its 30 per cent profit growth. Delivering such
growth, quarter after quarter, is a carefully crafted strategy. It’s a well-known fact that the
bank increases its provision cover for its loans, such that it can deliver 30 per cent growth
in more challenging years.

⮚ This strategy is evidently paying off this year. Though the net interest income has grown
at 22.3 per cent in the first quarter compared to the corresponding one last year, the bank
has managed to deliver a 30 per cent net profit growth.
⮚ As the banking industry is wrestling high non-performing assets (NPAs), the most
untouched lender HDFC Bank’s magic wand seems to be its high degree and frequency of
engagement with its clients to pick early warning signals.
⮚ Over the last two years, while most banks, including large public and private sector, have
witnessed a higher level of NPAs in the range of 5-15 percent, HDFC Bank has remained
shielded with its NPAs at 1.24 percent as on June end.
⮚ HDFC Bank engage with its client at a much higher degree and frequency and that is a
part of the entire delivery mechanism which helps us deal with the client to not only resolve
banking pain points, add value or bring another level of technology or digitization but also
allows us to pick up early warning signs.
⮚ There are certain things that have made this bank successful across businesses. One of them
is prudence. Bank was selective and used prudence in lending…and looked at the input and
output risks to see what value the project provided
⮚ HDFC Bank took a conscious decision to limit exposure to the infrastructure sector and at
that time it looked like an opportunity lost. Today, bank is being hailed as visionaries. It is
simply doing the basics right.
⮚ Bank looks at the corporate before lending and the team visits and checks the projects
based on the data and information shared by them.
⮚ It uses a client-centric approach to make tailor-made products to meet their requirements.
This has helped to gain market share. In the next 12-18 months, bank would continue to
gain market share with the same strategy.
⮚ The fundamental change is that digitization and technology are playing a key role as an
enabler and differentiator.
⮚ Sensing an opportunity from the NPA trouble within public sector banks, HDFC bank aims
to grow its term financing and though the private investments have not picked up as
expected it has provided a lot of refinancing opportunities where the implementation and
project risk is done away with.
⮚ As the majority of the banking system players, including its private sector peers fight the
scourge of bad loans and frauds, HDFC Bank said it is looking at expanding its market
share.

37
 ⮚ HDFC Bank, which is by far the best-managed large lender when it comes to NPAs, has
only five accounts of over Rs 100 crore, aggregate exposure to these accounts is only Rs
827 crore.
⮚ Held banks ground by consciously staying away from funding what bank perceived were
riskier assets.
⮚ In the second half of the year, bank was asked what bank did differently that enabled to
stay resilient and be the preferred choice in the flight to safety.
⮚ Perhaps a combination of experience and adhering to banks risk appetite held bank in good
stead

5.4MAIN LOANS FOCUSED BY CRMD

COMMERCIAL LOANS:
FUND BASED

⮚ WORKING CAPITAL DEMAND LOAN (WCDL)

Working Capital Demand Loan (WCDL) is provided to meet working capital requirements. It
shall be within the assessed working capital limits. It can be available as a sub limit of funded
working capital limit.
● Period of the loan is up to 12 months
● Suitable for Mid / Large corporates having turnover more than Rs.500 Crores OR
minimum exposure ( Funded + Non Funded) of Rs.25 Crores

⮚ TERM LOANS
Federal Bank offers term loans for mid / large corporates having turnover more than Rs.500 Crores
or projects with outlay of Rs.500 Crores or more OR minimum exposure (Funded + Non Funded)
of Rs.25 Crores. Term loans are provided to extend long term credit facilities to entrepreneurs such
as:

● Expansion & Modernization, setting up of factory building and other infrastructure

facilities
● Substitution of high cost debts / high cost term debts of other Banks / FIs
● Up-gradation of technology & energy conservation schemes / machinery
● Design and introduction of new layouts in the factory to enhance productivity
● Acquisition of software, hardware, consumable tools, jigs, fixtures etc.
● Acquisition of ISO and other similar certifications

38
 ● Loans under Technology Upgradation Fund Scheme(TUFS)
● Securitization of receivables
Period of the loan will be up to 60 months. Repayment can be made In Monthly /Quarterly / Half
yearly installments or bullet repayments. (N banking and finance, a bullet loan is a loan where
payment of the entire principal of the loan, and sometimes the principal and interest, is due at the
end of the loan term.)
⮚ PROJECT LOAN
Project Loan is provided to corporate borrowers for the purpose of capital expenditure including
setting up of new/ additional manufacturing facilities, construction etc. Project loan is also
available to acquire the fixed assets like land & building, plant & machinery etc.

Project Loan is offered for

● Mid / Large corporates having turnover more than Rs.500 Crores or Projects outlay of
Rs.500 Crores OR minimum exposure ( Funded + Non Funded) of Rs.25 Crores
● Companies executing various infrastructure projects in sectors such as power- hydel /
thermal / solar, roads, highways, bridges, ports, dams, airports, rail system, water supply,
irrigation, sanitation and sewerage system, telecommunication, housing, industrial park
or any other public facility of a similar nature, construction relating to project involving
agro processing, supply of agricultural inputs, preservation and storage of processed agro
products, educational institutions and hospitals as may be notified by RBI from time to
time ,Commercial Real estate projects like Hotels, residential / commercial complexes,
setting up new plant / manufacturing facilities etc.
NON-FUND BASED
⮚ LETTER OF CREDIT (LC)
● Document issued by a bank that guarantees payment for goods or services when the
seller provides acceptable documentation.
● Three participants. First, the beneficiary, the person or company who will be paid.
● Next, the buyer or applicant of the goods or services.
● Finally, the issuing bank, the institution issuing the letter of credit.
● A letter of credit is a written instrument issued by a banker (opening or applicant's bank)
at the request of the buyer (opener or applicant) in favour of seller (Beneficiary),
undertaking to honor drafts drawn by the seller in accordance with the terms and
conditions specified in the letter of credit.

39
 ● Suitable for Mid / Large corporates having turnover of Rs. 500Crores and above OR
minimum exposure ( Funded + Non Funded) of Rs.25 Crores
● Eligible limit is minimum Rs.10 Crores.
● Period for Inland LC is up to 180 days for Import LC is up to 360 days

⮚ BANK GUARANTEE FOR CORPORATES

Bank guarantee (BG) is used to strengthen and/or secure an obligation under a commercial
contract. Customers can apply to the Bank to issue BG in favour of a Beneficiary. After
examining and approving the application, the bank executes an agreement with the customer
with the required terms and conditions. The bank will then issue the guarantee.
● Financial Guarantees, Performance Guarantees and Differed Payment Guarantees are
provided to eligible customers
● Financial Guarantee is in INSTEAD(LIEU) of monetary obligations
● Performance guarantee is in respect of performance of a contract
● Deferred payment guarantee is provided when the guarantee is backed by adequate tangible
security or by counter guarantees of Central or State Governments, public sector financial
institutions or other companies.

⮚ BILL DISCOUNTING
We provide extension of working capital finance to suppliers under LC or Invoice discounting.
● Facility is provided to Mid / Large corporates having turnover of Rs.500 Crores and
above OR minimum exposure (Funded + Non Funded) of Rs.25 Crores
● Period of the facility is up to 180 days
Sight invoice: Generally a documentary bill payable on demand tendered for purchase shall consist
of the following:
● A Sight draft of the drawer to the value of the invoices of the respective goods
consigned.
● Documents of title to goods covered by the bill viz. (a) Railway Receipt or (b) Lorry
Receipt of an approved carrier or (c) Bill of Lading (Inland).
● Invoices or contract notes of Bills of sale in respect of the goods covered by the
documents.

40
 ● Transit Insurance Policies, if they have been taken.
Usance: Usance Bill (bill of exchange) is the one which is expressed to be payable after a specified
period (Usance) mentioned in the bill. Usance bill may be a clean bill or may be
● accompanied by documents of title to goods evidencing dispatch of goods (Railways
Receipt/Lorry receipt/ shipping documents)
● Usance Bill of Exchange
Invoice: Under Invoice Financing, the lending bank agrees to purchase a company's outstanding
invoices (debtors) which are payable over a period of time, on an ongoing basis, and then provides
funding by way of prepayment of invoice value of the approved debt.

⮚ PACKING CREDIT LIMIT (PCL)

Packing Credit Limit (PCL) is provided to an exporter for financing the purchase, processing,
manufacturing or packing of goods prior to shipment /working capital expenses.
● Period of the facility is based on Export Cycle up to 6 months(180 day)

⮚ REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD)

EBRD is provided to exporters for discounting of export bills at rates linked to internationally
competitive interest rates at post shipment stage.
● Rate of interest is linked to LIBOR(BASIC IR USED IN LENDING BW LONDON
INTERBANK MARK)
● No margin generally for bills under LC
● Period of the facility is up to 12 months

⮚ PACKING CREDIT LOAN IN FOREIGN CURRENCY (PCFC)

Packing Credit Loan in Foreign Currency (PCFC) is a form of pre shipment finance to exporters
at internationally competitive rates.
● Rate of interest is linked to LIBOR
● The exporter will have a choice of currency i.e. USD (68.95RS), GBP (87.17
(POUND)), Euro (77.91) etc.
● Period is based on Export Cycle, up to 6 months (180 days).

41
TRADE FINANCE:
⮚ LC BILL DISCOUNTING
Bank offers the LC Bill Discounting facility to its customers.
Requirements:
● The bills should be drawn under irrevocable (not able to be changed) Letter of Credits
issued by a Commercial Bank in India.
● The Bills drawn are in strict conformity with the terms of the LC.
● Bills of exchange should have arisen out of bonafide commercial or trade transactions.
Documents:

● Bill of exchange
● Letter of credit
● Receipted Challan being proof of delivery of goods/ Documents of title to goods
evidencing dispatch of goods (RR/ LR/ shipping documents)
● Any other relevant documents.
● The bills should be got accepted by the drawee through their bankers.
● Interest for the usance period, actual postage and handling charges will also be collected.

⮚ BANK OF GUARANTEE:
Types of Bank Guarantees
● Financial guarantee
● Performance guarantee

Performance Guarantee
Performance Guarantee is one by which:
● Due performance of a contract undertaken by a customer in favour of Govt. bodies and
others for supply of materials, construction of building etc.
● Due performance of an equipment/project after completion for a specific period.

Financial Guarantees
Financial Guarantees provided by us include:

42
● BG issued in lieu of earnest money/security deposit specified to be deposited while
contractors bid for a tender in favour of Government Departments and others.
● BG issued in favour of Customs Department in respect of payment of customs duty by
the customer.
● Guarantees for obtaining advance payment
● Guarantees issued in favour of IATA/Airlines for providing air tickets to travel agents.
● Guarantees issued in favour of Electricity Boards and Power Utilities, Water Boards
etc. guaranteeing payment of electricity/water bills
● Guarantees issued for releasing retention money.
● Guarantees issued in favour of nominated Banks for selling gold to Jewelers on credit.
● Guarantees issued in favour of Customs/Excise/Sales Tax for deferring payment of
duties.
● Guarantees/ Comfort letters issued in favour of lenders of buyer's credit/ suppliers
credit.
● Guarantees issued in favour of Banks/ FIs guaranteeing repayment of loans.
● Guarantees issued to Stock Exchanges on behalf of stockbrokers for margin money.
● Guarantees issued under EPCG Scheme for customs duty exemptions.

⮚ EXPORT POST SHIPMENT CREDIT

● Post shipment credit is a loan or advance granted or any other credit provided by the
Bank for export of goods/services from India.
● For demand bills, the period of advance will be the Normal Transit period (as specified
by FEDAI (FOREIGN Exchange dealer’s assortment of India)).
● For usance bills, the period of advance will be usance period of the bill plus Normal
Transit period, if applicable and grace period, if any.
● Documents of title to goods exported will be treated as security.
● Post shipment credit should normally be liquidated (wind up the affairs of business)by
the proceeds of export bills received from abroad in respect of goods exported/services
rendered.
● The exporter has the option to avail pre shipment credit and post shipment credit either
in rupee or in foreign currency. However if the pre shipment credit has been availed in
foreign currency, the post shipment credit has also to be availed in foreign currency.
● DOCU: Export bills negotiated under letter of credit
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 ● Export bills purchased under confirmed orders/export contracts
● Advances against export bills sent for collection etc.

⮚ EXPORT PRE SHIPMENT CREDIT

Need loan or advance for purchasing, processing, manufacturing and packing of goods prior to
shipment, one can rest easy with Export Pre Shipment Credit from Federal Bank. Bank is
extending Pre shipment credit (Packing Credit) to exporters for purchasing, processing,
manufacturing and packing of goods prior to shipment.
How to Apply: Individuals, Firms, Companies or any other legal entity engaged in export of
goods can avail this facility.
DOCUMENTS REQUIRED:
● Hypothecation/pledge of stock meant for exports
● Against trust receipts or documents of title to goods
T/C: Terms of Granting the Loan
● Letters of Credit opened in favour of the exporter by importer's bank
● A confirmed and irrevocable order for the export of goods from India
● Other evidence of an order for export from India having been placed on the exporter
unless lodgment of export orders or letters of credit have been waived by the Bank
Period
● PCL is granted for periods decided upon the circumstances of each case, such as
time required for procuring, manufacturing or processing of the goods. It is released
in a lump sum or in stages, as per the requirement for executing the order/LC.
● PCL would normally be liquidated out of the proceeds of export bills negotiated.
5.41 WORKING CAPITAL DEMAND LOAN (WCDL)

WHAT IS A WORKING CAPITAL LOAN?

● A working capital loan is a loan that is taken to finance a company's everyday operations.

● These loans are not used to buy long-term assets or investments and are, instead, used to
provide the working capital that covers a company's short-term operational needs.

● Those needs can include costs such as payroll, rent and debt payments.

● Working capital loans are simply corporate debt borrowings that are used by a company to
finance its daily operations.

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ASSESSMENT OF WORKING CAPITAL LOAN
RBI of India has permitted banks to evolve their own lending methods. Following methods are
adopted by the bank for assessment of WC requirement of various categories of borrowers, other
methods may also be used by the bank for working capital assessment if found reasonable and
appropriate.

❖ Turnover Method (WC limit of 2 crore or less)

❖ Maximum permissible Bank Finance Method (WC limit of more than 2
crore)
❖ Cash Budget Method (cash flow)

Many businesses do not have sufficient cash in hand or liquid assets like money in the current
account to meet their daily operational expenses. This is where working capital finance comes to
their rescue. Small retailers or merchants typically require capital to fund seasonal inventory build-
up. Also, businesses that do not have stable revenues through the year may still need to maintain
a specific amount of inventory to fulfil any sudden increase in demand for their products. Such
units often require a working capital loan to pay wages or meet other expenses during lean periods
or when they are servicing an order, and the receivables would become due only after order
fulfilment.

The proper assessment of working capital needs is an important part of efficient financial planning.
It allows a business to plan well and arrange the necessary funds on time to ensure smooth
functioning of daily operations. The amount of current or working capital required by a business
may vary. It is dependent on the operating cycle, or the amount needed to pay suppliers, the amount
of inventory held and the time taken to collect cash from customers. Also, this may change with
changes in demand for its products and services.

By definition, working capital is the amount by which current assets exceed current liabilities.
However, if you simply run this calculation each period to try to analyze working capital, you
won't accomplish much in figuring out what your working capital needs are and how to meet
them.A more useful tool for determining your working capital needs is the operating cycle. The
operating cycle analyzes the accounts receivable, inventory and accounts payable cycles in terms
of days. In other words, accounts receivable are analyzed by the average number of days it takes
to collect an account. Inventory is analyzed by the average number of days it takes to turn over the
sale of a product (from the point it comes in your door to the point it is converted to cash or an
account receivable). Accounts payable are analyzed by the average number of days it takes to pay
a supplier invoice.

Most businesses cannot finance the operating cycle (accounts receivable days + inventory days)
with accounts payable financing alone. Consequently, working capital financing is needed. This

45
shortfall is typically covered by the net profits generated internally or by externally borrowed funds
or by a combination of the two.

WORKING CAPITAL MARGIN kljihihiuoipofghjkrtyuikoptyuio

Reexamined accounting report acquainted with be utilized from 31st March 2012 which contains
pretty much the isolation according to bank's needs. Proprietor's assets and Share Application
Money are included as one gathering, Current and Non-Current Liabilities as rest in the liabilities
side. The Assets side is disentangled into Current and Noncurrent Assets. At last the newcomer,
with the expectation not to confound him toward the beginning of the vocation, is educated
fastidiously the idea of edge. He is given the principal fundamental exercise in credit which is edge
is only “current asset- current liabilities = margin”
5.42 WORKING CAPITAL TERM LOAN SCHEME (WCTL)

A term loan is a credit from a bank for a particular sum that has a predetermined reimbursement
plan and either a fixed or drifting loan cost (variable). A term credit is regularly proper for a set up
private company with sound budget summaries and the capacity to make a generous up front
installment to limit installment sums and the all-out expense of the advance

HOW A TERM LOAN WORKS : In corporate acquiring, a term credit is as a rule for gear, land
or working capital paid off somewhere in the range of one and 25 years. Regularly, an independent
company utilizes the money from a term credit to buy fixed resources, for example, hardware or
another structure for its creation procedure. A few organizations acquire the money they have to
work from month to month. Numerous banks have set up term-credit programs explicitly to help
organizations thusly.

TYPES OF TERM LOANS

Term loans come in several varieties, usually reflecting the lifespan of the loan.

A short-term loan, as a rule offered to firms that don't fit the bill for a credit extension, for the
most part runs not exactly a year, however it can likewise allude to a loan of as long as year and a
half or somewhere in the vicinity.

An intermediate-term loan by and large runs mutiple – however under three – years and is paid
in regularly scheduled payments from an organization's income.

A long-term loan runs for three to 25 years, utilizes organization resources as insurance and
requires month to month or quarterly installments from benefits or income. As far as possible other
monetary responsibilities the organization may take on, including different obligations, profits or
principals' pay rates and can require a measure of benefit put in a safe spot for loan reimbursement.

46
5.5 LOAN PROCEDURE

PROCEDURES:
1. Finding planned loan clients,

2. Evaluating a planned client's character and truthfulness of direction,

3. Making site visits and assessing a planned client's credit record,

4. Evaluating a planned client's money related condition,

5. Assessing conceivable loan security and consenting to the loan arrangement,

6. Monitoring consistence with the loan understanding and other client care needs.

These are explained below;

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1. FINDING PROSPECTIVE LOAN CUSTOMERS

Most loans to people emerge from an immediate solicitation from a client who moves toward an
individual from the moneylender's staff and requested to round out a loan application. Then again,
Business loan demand, frequently emerge from contacts the loan officials and salesmen make as
they request new records structure firms working in the moneylender's market zone.

2. EVALUATING A PROSPECTIVE CUSTOMER’S CHARACTER AND SINCERITY

OF PURPOSE

When a client chooses to demand a loan, a meeting with a loan official typically follows, allowing
the client the chance to clarify his/her credit needs. That meeting is especially significant in light
of the fact that it gives a chance to the loan official to survey the client's character and earnestness
of direction. On the off chance that the client seems to need truthfulness in recognizing the need
to stick to the details of a loan, this must be recorded as a solid factor weighing against endorsement
to the loan demand.

3.MAKING SITE VISITS AND EVALUATING A PROSPECTIVE CUSTOMER’S

CREDIT RECORD

In the event that a business or home loan is applied for, a loan official regularly makes a site visit
to evaluate the client's area and the state of the property and to pose explaining inquiries. The loan
official" may contact different leasers who have recently loaned cash to this client to perceive what
their experience has been. A past installment record frequently uncovers much about the client's
character, the genuineness of direction, and awareness of other's expectations in utilizing credit
reached out by a loaning foundation.

4. EVALUATING A PROSPECTIVE CUSTOMER’S FINANCIAL CONDITION

On the off chance that all is positive to this point, the client is approached to present a few
significant archives the moneylender needs so as to completely assess the loan demand, including
total fiscal summaries and, on account of a partnership, the governing body goals approving the
arrangement of a loan with the bank.

When all records are on document, the bank's credit examination division leads an intensive money
related investigation of the candidate, planned for deciding if the client has adequate income and
reinforcement resources for reimburse the loan.The credit examination division at that point
readies a short rundown and suggestion, which goes to the suitable loan board of trustees for
endorsement.

48
5.ASSESSING POSSIBLE LOAN COLLATERAL AND SIGNING THE LOAN
AGREEMENT

On the off chance that the loan board of trustees affirms the client's solicitation, the loan official
or the credit panel will typically mind the property or different resources for be swore as security
so as to guarantee that the loaning organization has quick access to the insurance or can obtain title
to the property in question if the loan understanding has defaulted. When the loan official and the
loan panel are fulfilled that both the loan and the proposed security are sound, the note and different
archives that settle on up a loan understanding are arranged and marked by all gatherings to the
understanding.

6. MONITORING COMPLIANCE WITH THE LOAN AGREEMENT AND OTHER

CUSTOMER SERVICE NEEDS
The new understanding must be observed constantly to guarantee that the conditions of the loan
are being followed and that every necessary installment of head and enthusiasm being made as
guaranteed, for bigger business credits, the loan official will visit the client's business
intermittently to beware of the company's advancement and see what different administrations the
client may need. Usually, a loan official or other staff individuals enter data about another loan
client in a PC record known as client profile. This document shows what benefits the client is at
present utilizing and contains other data required by the executives to screen a client's advancement
and money related help needs.
LOAN SANCTION
●Determination of the measure of Loan to be authorized: Upon acceptable finishing of the
procedure abridged above, banks staff decide the measure of loan to be allowed to the imminent
borrower. Key determinants of the measure of loan that can be authorized are the IIR (portion to
pay proportion) and LTV (loan to esteem proportion). IIR is the proportion of the regularly
scheduled payment to the all-out month to month salary of the borrower. LTV is the proportion of
the loan an incentive to the assessed estimation of the security. The borrower is qualified to take a
loan up to the sum as landed by an institutionalized estimation.
●Preparation of the Loan Proposal: Based on the previously mentioned examination systems, a
loan proposition is readied. The loan proposition incorporates a loan examination note, assessment
outline, and review and valuation report. On the off chance that the loan proposition is acceptable,
it is sent by authorities with suggestion on the loan sum. The financing cost to be demanded on the
imminent borrower depends on an Interest diagram which depends on criteria, for example, the
candidate's pay profile, ability to reimburse the loan, the estimation of the property, attractiveness
of the property, family foundation, and so forth.
●Scrutiny of the Loan Proposal: Loan recommendations are examined by head office authorities.

49
●Approval/Sanction of the Proposed Loan: If the proposition meets with the necessary criteria,
at that point the loan is endorsed by the authorizing authority.
●Preparation of Loan endorse letter: Pursuant (as per) to authorize of the loan by the
administrative center, a loan endorse letter with the particulars of the assent is imparted to the
borrower and now the borrower is required to submit unique archives in connection to the security.
●Guarantor's credit value: An underwriter, who ought to be a financially sound individual either
a specialist or an administration worker, is likewise approached to be involved with the agreement
and at risk to the organization in the event of any default in reimbursement of loan portions by the
borrower.
LOAN DISBURSEMENT

●Execution of Loan Agreement and Disbursement of Loan: The loan sum is dispensed to the
borrower simply after the loan understanding is executed and the understanding is agreed upon.
Before loan payment, Company additionally finishes different conventions, for example,
assortment of postdated cheques from borrowers in regard of the regularly scheduled payments,
and so on.

SECURITIES:

Any individual who needs a loan from a bank or some other budgetary organization needs to set
some protection from taking loan. The security may be kept with the loan specialist or the client
(borrower) based on the sort of security.

These securities are of two types:

primary security

● These are the assets directly related to your business or project for which you have taken a
loan and kept that as security.
● So a primary security can be the thing that is being financed.
● For example: a factory for which u have taken loan and kept that as security, taken loan for
a car and kept that as security, etc.

Collateral security

● These are any assets other than primary securities, which are kept as security against taking
credit or a loan.
● It can also be issued by a third party or any intermediary.
● For example: taking a personal loan and mortgaging your house, hypothecation of jeweler
against any loan, etc.

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5.6 RISK MANAGEMENT:

Risk management is defined as:

• The likelihood of occurring an undesirable event.

• The magnitude of loss from an unexpected event.

• The probability that “things won’t go right”.

• The effects of an adverse outcome

Risk management function involves

- Continuously measuring the risk of its current portfolio of assets and other exposures,

- communicating the risk profile of the bank to other bank functions and

- taking steps either directly or in collaboration with other bank functions to reduce the possibility
of loss or to mitigate the size of the potential loss.

TYPES OF RISK

i. CREDIT RISK

● potential loss a bank would suffer if a bank borrower fails to meet its obligation
● pay interest on the loan and repay the amount borrowed
● Arises from the possibility that loans will not be repaid either partially or fully.
● Credit risk is often synonymous with default risk

MEASUREMENT OF CREDIT RISK

STANDARDIZED APPROACH

● banks use a risk-weighting schedule

● by assigning risk weights based on the rating assigned by the external credit rating
agencies

INTERNAL RATING BASED APPROACH

● allows banks to use their own internal ratings of counter parties and exposures
● ,which permit a finer differentiation of risk for various exposures
● Hence delivers capital requirements that are better aligned to the degree of risks.

51
ii. MARKET RISK

● Due to changes in market variables such as interest rates, currency exchange rates, equity
& commodity prices etc.
● Arising on account of inability to meet obligations as and when due.
● comprises Liquidity Risk, Interest Rate Risk, and Forex Risk
● two methodologies available to estimate the capital requirement to cover market risks:

1) The Standardized Measurement Method

● implemented by the Reserve Bank, adopts a 'building block' approach for interest-rate
● related and equity instruments which differentiate capital requirements for 'specific risk'
from those of 'general market risk'
● 'specific risk charge' is designed to protect against an adverse movement in the price of an
individual security
● 'general market risk charge' is designed to protect against the interest rate risk in the
portfolio

2) The Internal Models Approach (IMA):

● enables banks to use their proprietary in-house method

● meet the qualitative and quantitative criteria set out by the BCBS
● Subject to the explicit approval of the supervisory authority.

iii. OPERATIONAL RISK:

● because of failed internal process .people or system /external event

● risk of loss
● this includes legal risk
● inherit in all business process and activities of bank
Three approaches of operational risk are:

1) BASIC INDICATOR

● set charge as fixed percentage

● serves as a proxy for bank risk

2) STANDARD APPROACH

● institution separate’s option to 8 standard business units

3) ADVANCE MEASUREMENT

● risk measurecapital charges

52
 ● advice to adopt BIA for capital charges
● 15% of average gross income of last 3 years taken to calculate capital charge for
operational risk

CREDIT CONCENTRATION RISK

● Concentration of banks’ exposure to any single borrower or a group of exposure

● Threaten banks financial position or its ability to maintain its core operations

iv. LIQUIDITY RISK

● Market risk
● Inability to generate enough cash from either assets or liabilities to meet deposit
withdrawals or contractual loan financing
● Three types

1) FUNDING RISK

● Finding the outflow on a/c of unanticipated withdrawal of depo

● Eg: variation of renewal pattern .premature disclosure

2) TIME RISK

● Compensating non receipt of expected inflows of funds

● Performing assets changes to non-performing asset’

3) CALL RISK

● Funding the crystallization of contingent liabilities

● Eg: guarantees involved in bills developing under LC facilities

v. INTEREST RATE RISK

● Market risk
● Banks financial condition is affected by changes in market interest rate
● Net interest income-immediate change of interest rate
● Long term impact on :
i) Banks worth
ii) As economic value of banks assets. Liabilities n b/s position will be affected

vi. FOREX RISK (FOREIGN EXCHANGE RISK)

● Market risk
● Value of banks assets and liabilities changes due to currency exchange rate fluctuations

53
vii. REPUTATIONAL RISK

● Indirect risk to earnings or business position/capital of the bank

● Diff to define boundaries
● Result in loss of future income

viii.STRATEGIC RISK

● Due to strategic decision by bank n outcome of decision

● As a result of strategic or senior manga decision or business choices
● Which do not breach any rule, regulation or ethical conduct
● Risk that are not triggered by legal risk

iX. LEGAL OR REGULATORY RISK

● Operational risk
● Include exposure to fines penalties or punitive damages
● Fail to obey laws and regulations thereby to protect org legal right to observe contractual
commitments

EXTERNAL CREDIT RATING

● The guidelines for the implementation of a new capital adequacy framework issued by
Reserve Bank of India allow commercial banks to allocate capital in relation to the credit
risk of their exposures.
● Such credit risks are measured through ratings assigned by RBI approved 6 domestic rating
agencies viz CARE, CRISIL, India Ratings, ICRA, SMERA and Brickwork
● A bank loan rating indicates the degree of risk regarding timely payment of the bank facility
being rated; the facility includes principal and interest.
● Further, ratings show the overall strength and creditworthiness of the borrower which can
be used for internal decision making and business acquisition
● External rating is also an important parameter used for capital adequacy and monitored by
the analysts to assess the quality of Bank’s credit portfolio.
● External rating can be sought for all types of loans
● Under RBI guidelines External credit rating is not mandatory
● To achieve savings in capital requirement banks have started insisting on rating of credit
facilities.

RISK ADJUSTED RETURN ON CAPITAL

54
RAROC of a credit facility is defined as the ratio of Risk Adjusted Return derived from the facility
to Capital employed for the facility. Risk adjusted return is the return from the credit facility, after
all costs and expenses associated with lending (including interest costs, operating expenses and
risk premium for meeting expected loss).

RISK AND CONTROL SELF ASSESSMENT FRAMEWORK

❖ process whereby the Operational Risks that may arise from a Business or Function’s
strategy, objectives, products and activities are identified
❖ and the effectiveness of the controls over those risks are evaluated, tested and monitored
by the business units
❖ operational risks inherent in the business activities are identified, analyzed and the
adequacy & effectiveness of corresponding controls are assessed on a continuous basis by
the persons involved in the performance of business activities

KEY RISK INDICATORS (KRI)

❖ when monitored on a periodic basis help the Bank identify potential risk events
❖ Take steps to minimize the possibility of occurrence of the event or reduce its impact when
it occurs.

RISK BASED SUPERVISION (RBS)

To develop a risk profiling of commercial banks in India;

● As against rating by CAMELS (Capital adequacy, Asset quality, Management, Earnings

appraisal, Liquidity and Systems & controls) approach, which was more of a transaction
testing model
● It seeks to assess risk build up by examining whether the supervised entity/bank follows
regulatory prescriptions, and if its internal risk management practices are aligned with
regulatory expectations
● The supervisory rating exercise would aim at determining the overall probability of failure
of the bank in light of risks to which the bank is exposed, the strength of control/
governance and oversight framework in place and available capital.
● Includes both on-site examination and off-site surveillance of banks.
● Before a loan account turns into a non- performing asset (NPA), banks would be required
to identify emerging stress in the account by creating a sub – asset category under the name
‘Special Mention Accounts’ (SMA).
● This will follow with the requirement on the part of lender to mandatorily form the ‘Joint
Lenders’ Forum (JLF) so as to decide on refinance or recast of the loan.

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5.7CREDIT MONITORING

WHAT IS CREDIT MONITORING?

Credit checking targets guaranteeing consistence of terms of pre-dispensing conditions, keeping

archives legitimately enforceable, end utilization of assets according to the loan consent to forestall
redirection of bank reserves, security offered to the bank. Bank has set up a powerful post-
authorize procedure to encourage proficient and successful credit the executives and to keep up an
elevated level of standard resources. Credit Monitoring is a necessary piece of loaning action.

WHY CREDIT MONITORING IS DONE?

Banks have an incredible duty to keep up the nature of the advantages and to recoup the premium
and different contribution in time. In spite of the fact that sufficient safeguards are taken during
evaluation and authorization of an advance, an investor must be increasingly careful after assent
of the advance.

⮚EWS ought to be caught so as to distinguish the challenges in reimbursing the credits by

borrower.

⮚Unless early admonition signals are caught, a bank will most likely be unable to take appropriate
healing measures to capture the slippage in the nature of the advantage.

⮚Banks need to set up an extremely stable and successful credit checking framework for viewing
the borrower's record from different points.

⮚Ensure beginning conveyance or payment of acknowledge subsequent to agreeing for the set
down strategies and conditions with due precautionary measures

⮚Ensure that the credit resources stay in standard class

⮚Endeavour up-degree of recognized powerless records/watch list accounts and

⮚Take vital strides to forestall slippage of the records to unsatisfactory and NPA class

HOW CREDIT MONITORING IS DONE?

The focal point of the observing procedure is consistently to guarantee the security of assets loaned
and see that the record is directed according to the terms and states of the assent. It is important to
comprehend that recuperation of late sums or basic sums in Standard Assets causing concern is
basically a momentary technique. An inside and out examination of the issues confronting the
acquiring unit must be made and fundamental healing estimates should be started for guaranteeing
long haul feasibility of the unit. Checking capacity in a bank should cover all the three phases, viz.,
pre-payment, during dispensing and post-payment periods of a development account.

56
Monitoring –Pre Disbursement Stage
The pre-payment arrange covers getting good credit reports from existing banks, post-endorse yet
pre-dispensing assessment report, execution of the stipulated security archives, including
formation of insurance security/contract according to the particulars of the authorization, acquiring
letters of assurance from the underwriters, assuming any. Different customs, for example,
verifying of reports by legitimate specialists and guaranteeing payment by the other taking an
interest banks and budgetary establishments are likewise required as the obligation of the
observing office.

Monitoring – Disbursement Stage

During the payment, checking work ought to guarantee the end-utilization of the assets by
dispensing the sum in the correct way. Credit conveyance in advance records is unmistakable from
overdraft and money credit accounts. All payment ought to be identified with genuine/satisfactory
degrees of execution of the specialty unit and in accordance with the essential goal of wellbeing
of the banks' introduction in the credit resources. The payment ought to be equivalent with the
advancement of the venture/business movement, just as will consider the degree of edge got by
the advertisers up to the given purpose of time.
Monitoring –Post
Disbursement Stage
Post-dispensing checking structures a generous piece of the observing capacity in a bank. Real
execution of the borrowers ought to be checked by welcoming select operational information at a
specific recurrence. The specifics outfitted by the borrower should be contrasted with the
anticipated exhibition given with the bank before giving the credits. Periodical investigations and
stock review by the fitting authorities ought to be guaranteed. Opportune abstention and
investigation of the examined financials and survey of the record, in any event once in a year, is
the most indispensable piece of post dispensing observing. Convenient recognizable proof of
records indicating side effects of strain, and putting them under Watch Category for consistent
checking is completely basic.

⮚Action Branches need to see due ingenuity (an extensive examination of a business embraced by
an imminent purchaser, particularly to build up its advantages and liabilities and assess its business
potential) in credit both at pre-approval and post-endorse stages.

⮚By doing as such, it is conceivable to see early notice flags and attempt preventive activity.

⮚In this regard, an agenda of things of due persistence in credit dependent on advance strategy,
RBI and bank-explicit rules and best practices followed in banks is set up to support branches.

57
5.71 SMA AND WATCHLIST ACCOUNT

Before a credit account transforms into a non-performing resource (NPA), banks would be
required to recognize developing worry in the record by making a sub – resource class under the
name 'Extraordinary Mention Accounts' (SMA). SMA are those benefits/accounts that shows
indications of terrible resource quality in the initial 90 days itself. The Special Mention Accounts
are generally ordered as far as length.

Non-Financial signs are likewise considered for considering a Loan Advance is in SMA arrange.
For Example, on account of , SMA-0 Principal or intrigue installment not past due for over 30
days but rather account giving indications of nascent pressure, Delay of 90 days or more in
(a)submission of stock explanation/other stipulated working control articulations or (b) credit
observing or budget summaries or (c) non-recharging of offices dependent on reviewed financials.

Records that require expanded or increasingly visit observing ought to be set on a Watch List.
These might be circumstances distinguished under the yearly audit process or where proof of
expanding hazard is noted Watch posting of Accounts (WL) is the arrangement of hazard appraisal
of Loans for forestalling further debasement of benefits. Accordingly Watch posting of Accounts
serves the need of the administration to distinguish and screen potential dangers of an advance
resource. The motivation behind recognizable proof of potential NPAs is to guarantee that proper
preventive/restorative advances could be started by the bank to ensure against the advance resource
turning out to be Non-Performing. The classification of watch list is done to foresee credit
crumbling and find a way to maintain a strategic distance from their slippage into non performing
propels.

5.72 EARLY WARNING SIGNALS

Early Warning Signal (EWS) arrangement can help significantly lessen Loan past due and NPAs
by early distinguishing the side effect of any abnormalities or misery in the borrower conduct as
far as both inner and outside relationship. In this way, Bank can diminish just about 33% of the
Loan accounts having extremely weak wrongdoings manifestations tumbling to Sub-standard
Assets. Early admonition are motioned with a with Rule based examination that consolidates
bank's current and new information sources inside just as outside the center banking. Records are
followed and plotted on a scoring design by watching the whole Loan scene. Be that as it may,
creating and actualizing an early admonition structure won't be productive except if banks take
satisfactory preventive activities to alleviate dangers.

58
 TYPES OF EWS

The rundown of major early notice signals (EWS) saw from the investigation of banking activities,
which are reflected in the borrower's record account/proclamation of record, stock articulation,
MSOD, QIS, half-yearly/yearly budget summaries, site assessment reports, minutes of credit
consortium meeting, and so on.
 Unusual charge sections - Diversion of assets
 Unusual credit passages – Borrowing from outside
 Frequent return of checks – DP deficiency, Shortage of working capital
 Frequent return of bills-Low nature of items, Slackness in showcase request,
Accommodation charges (a bill, draft, or note made, drawn, acknowledged, or embraced
by one individual for another without thought to empower that other to fund-raise or
acquire credit along these lines.)
 Frequent overdrawing-Shortage of fluid assets, Decline in deals, Low acknowledgment
from account holders ,Payment to lenders, Withdrawal of assets for claim use, Incurring
money misfortunes , Building stock for theory
 Low turnover in the record – Sales continues through another record in other bank
 Frequent move to a record not associated with business-To extend higher DP in order to
coordinate with credit extraordinary
 Non-accommodation, deferred accommodation of stock proclamation/MSOD-Not
accomplishing anticipated degree of business, poor MIS
SOURCES OF INFORMATION FOR CREDIT MONITORING
⮚ Receive a certified statement of actual cost of the project from the borrower.
⮚ Compared with the projected statement of project cost to be incurred at each stage of the
project.
⮚ For cost overrun, if noticed, close monitoring is called for to prevent the account from turning
into a NPA.
⮚ In addition, site inspection of securities report is a very useful source to get early warning
signals.
⮚ Any erosion in the value of securities / negligence noticed on the part of the borrower to keep
securities in order would be a matter of concern.
⮚ The project loans should be disbursed as per the periodical progress reports submitted by the
borrower and subsequent site inspection done by the branch.
⮚ In terms of mega projects, we should obtain a report from the auditor on capital expenditure
incurred at each stage of the project to ensure the end use of funds.
⮚ Besides site inspection, credit monitoring should be done by obtaining periodical returns and
statements from the borrower were, including stock statement and book debt statement.
⮚ In addition, there are other sources of information for credit monitoring. These are internally
available to the bank, which include ledger account/ statement of account of the borrower,
branch inspection report/ risk-based internal audit report of the branch, stock audit report in
respect of high-value advances, long form audit report (LFAR)of the statutory auditor, annual

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 RBI inspection report / RBI risk-based supervision report, annual review report prepared on a
borrowable account at the time of renewal of cash credit limit, SMAs report, list of potential
NPAs/ stressed advances, etc.
⮚ In addition, banks should obtain a list of debtors of the borrower to ascertain timely realization
of book debts.
⮚ Here, we can compare sales realization with the turnover in the account and enquire reasons
for poor turnover. One such reason for poor turnover may be that the borrower has opened a
current account with another bank where in the sales proceeds are deposited.
⮚ Similarly, the bank should receive a list of major suppliers of raw-materials to ensure the end
use of bank funds. We should detect those cheques which are drawn in favour of parties not
related to the borrower's business to prevent diversion of funds.
⮚ Further, from the statement of debtors, we can confirm whether bills discounted are deducted
from the list of debtors.
⮚ Similarly, while calculating drawing power (DP) based on stock statement and stock
inspection, we should ensure whether advances received against orders for goods are deducted
to arrive at DP.
⮚ Letters of Credit (LCs) should be deducted from the total inventory. More importantly, month-
wise purchases and sales should reasonably be reflected in the borrower's ledger
account/statement of account to prevent diversion of funds. In this regard, banks should insist
on the auditor of the borrower firm to certify, among other items, sources of funds, funds
brought in and end use of funds.

IMPACT OF CREDIT MONITORING IN BANKS

⮚ One of the big advantages of credit monitoring is that it can help prevent identity theft

⮚ It is a challenging task for the bank to keep the borrowable accounts in standard category and,
for this purpose, continuous monitoring of the accounts is necessary .Most of the Banks
have installed multiple monitoring mechanism and inspection at different levels viz
monitoring by branch managers, officers at controlling offices , audit by external agencies
,RBI, CA firms ,internal audit by head office etc. .
⮚ In spite of multi –level monitoring systems prevalent in the banks, fresh NPAs are added every
year, enhancing the risk of the loan portfolio.
⮚ Weakness in credit appraisal and credit monitoring has been identified as major reasons for the
accounts turning into non-performing assets. It needs hardly to be emphasized that unless
monitoring is done effectively, it is impossible to control slippage of standard asset to NPAs.
⮚ Enable banks to maintain high credit quality and controlling growth of stressed assets
⮚ monitoring of credit in banks has assumed greater significance in the effective management of
lending
⮚ Enables credit monitoring authorities to take timely decisions and corrective steps to keep the
borrowable accounts in good health

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⮚ Monitoring of the credit portfolio and individual accounts is essential in order to maintain the
quality of the credit portfolio of the bank in a sound condition
⮚ Enable banks in Identifying and evaluating the temporary/critical aberrations coming in the
way of smooth functioning of the borrowing unit for timely and suitable action
⮚ Enable banks in ensuring the end use of funds and prevention of diversion of funds
⮚ Ascertain as to whether there is any threat to the recovery of bank’s funds invested in the
business and to initiate timely and appropriate recovery measures to protect the interest of the
bank

5.73 CREDIT SUPERVISION AND CREDIT MANAGEMENT

While regular re-assessments, monitoring and evaluation represent a very crucial part of the
banks own part of the strategic conditions “subsequent to draw-down‟ of a facility that forms
the scheme of work for effective management of the credit facility from the point of approval
to the point of liquidation.

To appropriately open up the subject of the strategies of credit supervision demands brief
definitions of the central activities involved in credit supervision which includes, among
others:

⮚ A periodic re-assessment of the implementation of the individual credit approvals in

line with the banks credit policies, the specific provisions for each facility and the
regulatory authorities‟ requirements for every class of existing loans.
⮚ Monitoring of the use of the facility in strict conformity with the credit approval and
⮚ Periodic evaluation of the state of the facility vis-à-vis the business of the client for
control purposes as the need may arise.

Effective management of credit facilities is the most important function in lending for the
credit officer or manager after completion of the preliminary process of evaluation of the
proposition. The credit facility is nonexistent until the proposition is evaluated through
rigorous qualitative and quantitative assessment techniques, premising the ultimate decision
on historic facts and information and future projections obtained from the client.

The proposition for lending ultimately becomes a credit facility upon completion of the
evaluation procedure and decision to lend based on the agreement of the assessor and the
approving authorities on basis facts consisting of the lending canons, mnemonically referred
to as the C’s of lending, which are Capital, Capability, Character, Condition and Connection,
among other considerations.

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 Management of the facility incorporating supervision, monitoring and control commences
immediately after the proposition transforms from a request to an approved credit facility.
However, experience has proved that most lending officers underplay the importance of credit
control and administration in their function. They exercise personal judgment in authorizing
loans and disbursing such loans, in the hope that all will be well with the customer, his business,
the project financed and ultimately the bank’s money extended to the client in the facility.

THE RELEVANCE OF CREDIT SUPERVISION

It is a demonstration of reasonable financial practice for investors from the purpose of drawdown of
an advance, to persistently screen the customer's utilization of the bank's assets, the exhibition of the
subsidized business now and again and the resulting way of life of the customer. These exercises help
to ensure that the endorsed business reason for existing is the thing that the bank's assets are being
dedicated to, that the customers business is gaining the normal ground because of responsibility of the
credit office and that the customer has not relinquished the venture, to submit the bank's assets to
subsidize a reprobate way of life that could imperil the bank's assets.

It is an every day involvement with banking practice that when office have been affirmed especially
to "known customers", there is a typical inclination to accept that everything is great with the
organization and once in a while no move is made until the office is to be restored, most normally
following twelve schedule months. By chance, a great deal of startling occasions could create which
the investor would have found during the time spent checking and made brief move to stop before they
truly decay. In a similar vein, if the borrower and additionally his business are getting into troubles, it
is feasible for the investor to help in rescuing the circumstance by auspicious exhortation and activity.

⮚ Regulatory Logistics for Credit Evaluation, Monitoring and Control: A compelling procedure
of credit the executives and supervision through assessment, observing and control, accept that
both the financier and the client have perceived and agreed to the accompanying essential states
of credit the board.

⮚ Complying With the Legal and Regulatory FrameWork of All Regulatory Authorities All bank
credit offices are relied upon to be assessed, handled, endorsed and oversaw by the
arrangements and directs of the lawful and administrative structure The credit supervision and
control of a bank's credit office and the productivity of its portfolio the executives will to a
huge degree rely upon the getting, application and consistence with the different parts of the
legitimate framework and the administrative authorities‟ credit control request.

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CREDIT MANAGEMENT, SUPERVISION AND CONTROL MECHANISM

The administration, supervision and control component of the credit framework includes certain
specialized procedures, activities and subsequent meet-ups. The accompanying features are
significant in accomplishing adequacy all the while.

⮚Regular Review of Financial Statements: The exhibition of an association or an undertaking can

be evaluated, through an occasional survey of its budget reports, which incorporate exchanging,
benefit and misfortune articulations and monetary records. The above explanations contain
authentic proclamations of the exhibition of the business. While recorded proclamation has some
overall degree of value, they are regularly obsolete when they are delivered.

⮚Use of Working Capital and Other Assets and Liabilities Figures: Working capital figures are
additionally mentioned and examined occasionally by contrasting spending plans and genuine or
the past information with the present and fluctuations are gotten and broke down fittingly. Working
capital figures investigation could uncover the money related quality of the business regarding its
operational proficiency. The figures of working capital utilized incorporate. Current Assets: Cash
Debtors Stocks and work in progress Prepayments. Current Liabilities: Creditors and gatherings
Bank overdraft

⮚Periodic Review of Trading Operations: Trading tasks including the correlation of intermittent
developments as differences in the figures of Current Assets and Current Liabilities uncover
productivity of the executives of assets, benefit of the business, the quality of the present
proportion and the liquidity proportion the two of which explains the degree of and the probability
of progress or disintegration (dynamically more regrettable) in the degree of liquidity in the
business financed by the office. Some credit offices force a necessary degree of current proportion
and the liquidity proportion that the business must keep up during the money of the business.
Arrangement of the proper administration bookkeeping figures normally empowers suitable
affirmation of consistence and productive administration of the business the bank is financing.

⮚Supervision through Loan Disbursement Conditions Precedent and Conditions Subsequent: As

referenced prior, control measures are practiced on the administration of an office through the
inconvenience of conditions that must be satisfied by the customer before he could draw down the
office (for example conditions point of reference). A case of a condition point of reference could
be the arrangement of a recommended or indicated security and the full flawlessness of the security
before the credit assets could be drawn (evaluated).

⮚Regular Review of the Accounts of the Client: The credits officials should as an issue of
obligation investigate the customers‟ accounts routinely, to screen the two lodgments and
withdrawals. This empowers him to distinguish on time any unpredictable subsidizes move or
development that could be impeding to the enthusiasm of the bank's responsibility. Clients may

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have as a condition consequent to pay all returns of offers into the record before any further use is
made of assets. This must be regulated every once in a while to maintain a strategic distance from
the mystery lodgments of business continues in a contender financial balance's to keep the bank
from finding the utilization of the business' assets.

⮚Observing Special Disbursement Characteristics for Different Kinds of Loans. Various types of
advances request uncommon qualities of dispensing as an issue of power over the utilization of
assets after payment. A couple of the advances that fall into this exceptional class include: Housing
Loan, Share Loans, Agricultural Loans, Asset Purchase Loans, and Rent advance Loans. Every
one of these credits has explicit methods for spreading out their dispensing for reasons for control
and supervision of the bank's assets and the chaperon dangers.

OBJECTIVES OF CREDIT MANAGEMENT SYSTEM

 Fortifying the Credit Appraisal Procedures of Banks: This is accomplished by creating

precise and solid credit data on bank borrowers from a focal database. With such data
accessible, banks will be in a superior situation to assess the reimbursement capacities of
clients looking for new or extra credit offices from them. This will diminish or take out the
giving of credits to clients who had no ability to reimburse or potentially as of now had
non-performing and once in a while relinquished advances in different banks.
 Capacity and dispersal of Credit Data: The Credit Bureau catches all credits of N1 million
(head and premium) or more from banks' month to month returns on the entirety of their
clients. Banks are likewise required to give all other important information on the offices,
for example, names of borrowers, chiefs of borrower organizations, credit limit,
extraordinary sum, status of credit, protections vowed, and so forth. These information are
grouped in the CRMS database, which are made accessible to banks through credit status
enquiry/report.
 Observing of Over-Exposure to Borrowers: The combined credit data created by the Credit
Bureau will empower banks to distinguish borrowers who have contracted obligations in
overabundance of their reimbursement abilities. Banks are along these lines advised to
abstain from placing their assets into zones or divisions that are as of now encountering a
break or declining possibilities. It will likewise help banks in the assessment of the
reasonability or generally of recommendations on advances from clients.
 Encouraging Consistent Classification of Credits: The Credit Bureau will encourage
controllers' reliable characterization of credits allowed to the equivalent borrower(s) by
various banks.
 The Regulator will likewise have direct data on a client's worldwide obligation profile
accordingly taking out the mistaken arrangement of a client's credit as acting in one bank
and dubious or lost in another bank

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5.74 END-USE OF FUNDS

In cases of undertaking financing, the banks / FIs are seeking to ensure stop use of finances by
using, acquiring certification from the Chartered Accountants for the reason. In case of quick-time
period corporate / smooth loans, such an approach have to be supplemented by means of 'due
diligence' on the part of creditors themselves, and to the quantity possible, such loans should be
confined to only the ones borrowers whose integrity and reliability are above board. The banks
and FIs, therefore, should now not rely entirely on the certificate issued through the Chartered
Accountants however enhance their inner controls and the credit score danger control device to
decorate the nice of their mortgage portfolio.

The following guidelines are laid down for monitoring end use of funds

a) OBTAINING CERTIFICATE FROM CA/ CHARTERED ENGINEER/

CERTIFICATES FROM OTHER TECHNICAL EXPERTS: The bank shall not rely
Solely on certificate from CA / chartered engineer/ technical professionals for infusion of
promoter’s contribution and deployment of financial institution funds. Branch officials
shall independently verify and fulfill themselves regarding infusion of promoter’s
contribution through their account and usage of mortgage funds for the intended reason,
except acquiring certificates from CA/ Chartered engineer/ certificates from other technical
experts in following cases.

I.For all credit limits of rs forty lakhs and above acquiring certificates from CA/ Chartered
engineer/ certificate from other technical professionals, as applicable showing cease use of
facility availed is mandatory

ii. However, certificate from CA might not be insisted in cases where the disbursement is
made by using the financial institution at once to the supplier or supplier thereby making sure
quit use of price range.

b) FRR: FINANCIAL FOLLOW UP REPORTS shall be obtained for all working capital
limits of rupees five crore and above from the banking system either as sole bank or under
consortium/multiple banking arrangement. FFR-1 shall be submitted by the borrower
within six weeks from the close of each quarter. FRR-2 part A&B shall be submitted by
the borrower within two months from the close of the half year.
c) UNIT INSPECTION: All industrial units financed by the bank should be inspected at
stipulated periodicity. The periodicity of the unit inspection is explained in detail in
advance rules circular No 45.
d) STOCK AUDIT: stock audit shall be conducted at least annually during the second half
of every financial year in respect of all working capital limits of 5 crore and above secured
by stock so that the audit report shall not be older than 6 months as on balance sheet

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 date.Sanctioning authority may consider increasing the periodicity of stock audit wherever
found necessary.

5.8 TOOLS FOR CREDIT MONITORING

5.81 WORKING CAPITAL ACCOUNT:

⮚ ANALYSIS OF CONNECTED ACCOUNTS

⮚ PROCESS NOTE- CLAPS- CENTRALIZED LENDING AUTOMATION
PROCESSING SYSTEM
⮚ ACCOUNT TRANSACTIONS/ TURN OVER/ MONEY TRAIL
⮚ TIMELY SERVICE OF INTEREST
⮚ TOD/ADhoc FREQUENCY-WHETHER REGULARIZED OR NOT
⮚ RENEWAL/ YEARLY REVIEW
⮚ SECURITY
⮚ INSURANCE
⮚ CERSAI
⮚ Stock Statement- Margin Entry, Entered As Primary And Collateral, Drawing Power,
Insurance For Stock.
⮚ CHEQUE RETURNS
⮚ CONNECTED ACCOUNTS ARREARS
⮚ COMPUTE TURNOVER WITH ABS (audited balance sheet)
⮚ CREDIT RATING REVIEW-YEARLY-EXTERNAL AND INTERNAL RATING
⮚ ROC FOR PVT LTD COMPANIES
⮚ PCL (packing credit limit) AND FDBP
⮚ INSPECTION AUDIT COMMENTS
⮚ BUYERS CREDIT AND BILLS DUE
⮚ STOCK AUDIT REPORTS
⮚ MIS REPORTS / DASHBOARD DATA.
⮚ LMS (loan management system)
⮚ SAVE RISK

ASSESSMENT OF WORKING CAPITAL ACCOUNT TOOLS

⮚ ANALYSIS OF CONNECTED ACCOUNTS:

● While analyzing a Working capital loan in the specified portfolio (customer exposure
above 5 Cr) analysis of all connected accounts/ limits in the name of customer with
bank (including Fund based as well as Non funded based limits).
● Anomalies/irregularities noted in all those connected accounts will be treated as
EARLY WARNING SIGNALS for the major limits availed by the customer from

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 Bank. The whole accounts shall be listed as NPA due to the slippage of any one of the
connected accounts. Hence analysis of connected accounts will be conducted with high
importance and due diligence.
● In the case of Working capital term loans we offer, accounts become low churn due to the
below mentioned reasons
i) Manufacturing goods are not being sold
ii) Fund diversion
● To avoid that supervision and follow up is necessary which includes:
(i) To ensure that the working capital loan is used for the purpose it has been sanctioned for,
(ii) To keep a close watch in the borrower's activity and particularly to see if the project has been
started in time,
(iii) To evaluate the performance of the unit in terms of production sales, profit etc., and also to
see if the borrower is in line with the original plan,
(iv) To appreciate the management capability,
(v) To get information relating to external factors like economic situation, government policies
etc.and
(vi) To detect signals of sickness at an early stage in order to take corrective actions to avoid
sickness.
● People taking WC loan from the bank is not permitted to open a current account in another
bank without NOC. It shall be ensured that, borrower does not maintain operative account
(current) with other Banks. If so, it shall be ensured that, the borrower has obtained “No
Objection Certificate” for the same. Permitting opening and operating accounts with banks
other than lending banks may lead to borrowers of stressed accounts, opening current
accounts with banks outside their borrowing arrangement. There is every possibility that
these accounts are used to channel the revenues and other receipts without routing these
through the borrowing arrangement and thereby siphoning of funds. Hence, NOC for
opening/maintaining operative accounts with other banks shall be granted only in
unavoidable circumstances.
⮚ PROCESS NOTE- CLAPS- CENTRALIZED LENDING AUTOMATION
PROCESSING SYSTEM
● The relationship manager/ Branch will submit the proposal through CLAPs which include
● Customer profile
● Gist Of proposal
● CIBIL /CRISIL rating
● Activities of borrower
● Banking Arrangements
● Securities and apportioning
● Assessment of limits
● Partners/ Co-obligant (a person who promises or is obliged to pay a sum or carry out a
task.) details

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● B/S or financial figures
● Appraisal note is a summary of loan which includes the consolidation of above mentioned
assessments consolidated figures, margin and detail about security of loan
⮚ ACCOUNT TRANSACTIONS/ TURN OVER/ MONEY TRAIL: Proper ensuring of
borrowers account transactions, calculating the turnover, and money trail are important
tools for monitoring working capital credit. A Series of Connected Financial Transactions
and Exchanges, Especially When Revealed during the Investigation of a Crime is called
money trail that exists between two parties when a transaction is made. When someone is
up to no good, you follow the money trail to find out the truth. For the average business
owner, having a money trail ensures that the proper authorities can track your money and
transactions to make sure your business is legal and compliant. It also keeps your
employees accountable when handling your cash.
⮚ TIMELY SERVICE OF INTEREST: Ensuring Timely Repayment Of Interest So as to
avoid risk in repayment of working capital credit and is an effective monitoring tool.
⮚ TOD/ADhoc FREQUENCY-WHETHER REGULARIZED OR NOT:
⮚ AD-hoc PAYMENT: Adequate regular limits shall be sanctioned to borrower taking into
account the working capital cycle and other material facts so as to avoid request for ad hoc
limits by the borrower till next renewal of limits. Ad hoc requirement can arise on account
of cash flow mismatches, seasonal nature of business, change in external environment etc.
The circumstances and the reasons for considering ad hoc facility should be analyzed
carefully and mentioned in the appraisal note.
⮚ TEMPORARY OVERDRAFT: An overdraft facility is a credit facility wherein the
borrower can withdraw extra cash from its financial institution account than the to be had
balance. The banks expand an overdraft restrict, and the borrower can withdraw up to the
extended restrict as and when required. A temporary overdraft or a TOD is a bank product
that falls within the subcategory of an overdraft facility. While everyday overdraft is
extended for a longer time period, a brief overdraft is usually extended from anywhere
between 30 to ninety days as in line with the requirement of the account holder. For
instance, if the financial institution has given its account holder a 30 days transient
overdraft, and if the account holder makes use of his overdraft facility, then he must pay
off the overdrawn quantity inside 30 days.Another odd characteristic of a brief overdraft is
that it's also extended to human beings and no longer enterprise entities. This product is in
particular tailored for private finance and isn't very universal industrial finance option.
Bank generally asks for collateral to increase transient overdraft facility.
An overdraft facility is a credit score facility in which the borrower can withdraw more
money from its financial institution account than the available stability. The banks amplify
an overdraft restrict, and the borrower can withdraw up to the extended limit as and whilst
required. If someone isn't always capable of repay the loan, the bank provide brief overdraft
that's transient or advert-hoc facility for more than a 12 months and make certain the
repayment earlier than the ADhoc or TOD restriction is crossed.

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 ⮚ RENEWAL/ YEARLY REVIEW:
At present, bank reviews working capital limits at least once in a year based on audited financial
statements. However, audited financial statements of MSE units would ordinarily be available with
a time lag, post-closing of the financial year. In such cases and where bank is convinced that
changes in the demand pattern of MSE borrowers require a mid-term review, we may do so. Such
mid-term reviews shall be based on an assessment of sales performance of the MSEs since last
review without waiting for audited financial statements. However, such mid-term reviews shall be
revalidated during the subsequent regular review based on audited financial statements.
The Loan Have To Be Renewed With Details Of F/S Or B/S. If the borrower is not able to submit
their B/S or F/S for renewal shows the financial instability of the borrower.
⮚ SECURITY- Primary/ Collateral, Margin- Anyone who is in need of a loan from a bank
or any other financial institution has to put some security against taking loan. The security
might be kept with the lender or the customer (borrower) on the basis of the type of security.

The security for bank credit for working capital purposes is in the form of:

1. Goods/stocks which include raw materials, work-in process, finished goods, consumables
spares and stores.
2. Accounts receivable or book debts.
3. Bills of exchange drawn by the customer on its buyer representing genuine trade transaction.

● Securing for bank credit could be in the form of a direct security or an indirect security.
● Direct security includes the stocks and receivables of the customers on which a charge is
created by the bank through various security documents.
● If in the view of the bank, the primary or direct security is not considered adequate, or is
risk-prone, that is subject to heavy fluctuations in prices, equity etc. the bank may require
additional security either from the customer or from a third party on behalf of the customer.
● The additional security so obtained is known as ‘indirect’ or ‘collateral security’. The term
collateral means running parallel or together and collateral security is an additional and/or
separate security for repayment of money borrowed.
● In case the customer is unable to provide additional security when required by the bank, he
may be required to provide collateral security from a third party. The common form of
third party collateral security is a guarantee given by a person on behalf of the customers
to the bank.
● The third party collateral security in turn may be secured or unsecured. For example, where
the guarantor has executed a guarantee agreement only, the collateral security is unsecured.
● However, if he lodges along with the guarantee agreement security such as title deeds to
his property creating mortgage by deposit of title deeds with the bank, a secured collateral
security is created
The need for maintenance of MARGINS arises for such reasons as:

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1. to ensure the owners stake in the business;
2. to insulate the banker from price fluctuations of his security (i.e. current assets); and
3. in the event of enforcement of security, the banker would need to realize in full the principal
amount lent as well as interest and other charges due.

● The level of margins would therefore be dependent not only on the security offered, e.g.
margins on stock-in-process normally being higher than that of raw material or finished
goods, but also the type of borrower.
● Larger borrowers and those with comfortable liquid position may be required to contribute
higher margin while the weaker unit would be able to contribute less.
● Within the overall credit limit sanctioned to a borrower, actual drawings in the account
would be determined on the basis of a periodic (monthly or weekly) stock statement and
the statement of receivables to be submitted by the borrower
⮚ INSURANCE- Stock insurance covers stock in the event that it is stolen, damaged or
destroyed, paying out the money to replace it. The cost of the policy varies depending on
the value and quantity of the stock insured and the insurance payment is based on the stock
price of the item. Ensure the insurance of primary security, mostly stock, to avoid risk when
the security has been destroyed or damaged.

⮚ CERSAI- Central Registry of Securitization Asset Reconstruction and Security

Interest is a central online security interest registry of India. It was primarily created to
check frauds in lending against equitable mortgages (lender is secured by taking possession
of all original title documents of property that serves as mortgage), in which people would
take multiple loans on the same asset from different banks. Ensure that the borrowers
company is registered under CERSAI in order to avoid frauds in working capital credit
repayment.

⮚ In India, before the formation of CERSAI, information on the encumbrance on a property

was known only to the borrower and the lender due to fragmented registration system. As
a result, people could obtain multiple loans on the same property. Some people used to take
one loan from one bank, which would hold the deed papers. Then they used to take several
more loans from other banks using attested copies of the deed, by claiming that they had
lost the originals. Some people also used to obtain loans using entirely fake title deeds or
by using color photocopies of the original title deed. [1] Properties with unpaid loans were
also being sold without informing the buyers of the existing liability on the property.
⮚ CERSAI initial mandate was to maintain a central registry of equitable mortgages, where
it contains information on the equitable mortgage taken on a property along with details of
the financial institution that has extended the loan as well as details about the borrower.
CERSAI also allowed lenders to register transactions of securitization (Securitization is
the financial practice of pooling various types of contractual debt) and asset
reconstruction.( Debt restructuring is a process that allows a private or public company,

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 to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can
continue its operations.)
⮚ STOCK STATEMENT- MARGIN ENTRY, ENTERED AS PRIMARY AND
COLLATERAL, DRAWING POWER, INSURANCE FOR STOCK.
●A stock statement is a business announcement that provides records on the cost and
quantity of inventory associated transactions. This assertion describes how a great deal
inventory become purchased at what cost and whilst, and is an issue of money owed and
finance provided with the aid of the coins credit account holder (e.G. A personal restricted
employer) to banks presenting loans at a ordinary interval. It info establishing and final
balances for transacted gadgets as well.
●Loan offering banks are curious to recognize what its clients stock values are at a sure
date. To ascertain this price, an accountant first desires to realize the existing quantity of
his business enterprise's stock on that day. This amount will then be improved through the
fee of its market cost and the result will become the stock price. Making a declaration of
all kinds of stocks in a company's save on that precise time will become a "financial
institution stock statement" and additionally referred to as "stock announcement".
●The level of margins would therefore be established not most effective on the safety
presented, e.G. Margins on stock-in-process generally being better than that of raw cloth
or finished goods, but also the sort of borrower.
● Larger borrowers and those with at ease liquid role may be required to make
contributions better margin even as the weaker unit would be capable of make a
contribution much less.
●Within the overall credit score restriction sanctioned to a borrower, actual drawings inside
the account could be decided on the basis of a periodic (month-to-month or weekly) stock
statement and the statement of receivables to be submitted by means of the borrower
●The inventory statement carries details of the stocks and different belongings charged to
the bank as additionally exceptional trade lenders. Based at the cost of the stocks and
receivables declared inside the monthly or weekly statements, less stipulated margins, the
banker could arrive at the quantity as much as which the borrower could be entitled to
borrow, based totally on the safety cowl to be had.
●It is a situation of financial institution lending that, at all times, notable inside the account
need to be protected with the aid of the fee of security to be had less margin. Drawings
inside the debtors account are accredited in the drawing power decided on the basis of
periodical inventory declaration but challenge to the sanctioned restriction and inside the
method the banker might additionally like to meet himself about the satisfactory, quantity
and valuation of the goods the borrower has declared in the stock statement.
●The banker may undertake periodically, a physical inspection of the inventory to make
sure that the stock declaration submitted displays a real image of the safety supplied.
●Ideally, a enterprise have to finance the “safety” shares or minimum degree of present
day property from its own sources, i.E. Capital and other lengthy-term price range. It is

71
 most effective the seasonal building up that the business should finance from quick-term
finances inclusive of alternate credit and financial institution finance.
⮚ CHEQUE RETURNS: A bounced check is slang for a cheque that cannot be processed
because the account holder has nonsufficient funds (NSF). Banks return, or bounce, these
cheques, also known as rubber cheques, rather than honoring them, and banks charge the
cheque writers NSF fees. In case of any cheque returns to the borrower, indicates the
financial instability of the customer. This adds to the risk in WC loan repayment. Ensuring
any cheque returns is an effective way of monitoring.
⮚ CONNECTED ACCOUNTS ARREARS: Money That Is Owned and Should Have Been
Paid Earlier but might not be paid. This can lead to a non- repayment of WC loans.
⮚ COMPUTE TURNOVER WITH ABS (audited balance sheet): Turnover of the
borrowers business is calculated using ABS so as to ensure the repayment. The turnover is
calculated in quarterly basis to ensure that whether the borrower will be able to yield the
expected turnover and whether he will have sufficient revenue to repay the WC loan .
⮚ CREDIT RATING REVIEW- YEARLY-EXTERNAL AND INTERNAL RATING
● Standard asset classification of the existing credit to be confirmed by verifying reports from
external agencies such as CIBIL, CRISIL etc.
● Risk grading internally assigning of rating by bank from FBR1, FBR2 up to FBR10, done
based on application scorecards shall be used to describe credit quality of a borrower for a
period of one year from the date of commencement of repayment of loans. Borrowers with
credit rating below FBR5 shall not be entertained.
⮚ ROC FOR PVT LTD COMPANIES:
 Registrar of Companies maintains a registry of records concerning companies
which are registered with them and allows the general public in accessing this
information on payment of a stipulated fee (Stipulated Price Contract is a standard
prime contract between Owner and prime Contractor that establishes a single,
predetermined fixed price, or lump sum, regardless of the Contractor's actual
costs.).The Central Government preserves administrative control over the
Registrar of Companies with the help of Regional Directors. As of today, there are
seven Regional Directors, supervising the operations of ROCs within their relevant
regions
● Functions of the ROC
o The ROC takes care of registration of a company (also referred to as
incorporation of the company) in the country.
o It completes regulation and reporting of companies and their shareholders and
directors and also administers government reporting of several matters which
includes the annual filing of numerous documents.
o The Registrar of Companies plays an essential role in fostering (to encourage)
and facilitating business culture.

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 o Every company in the country requires the approval of the ROC to come into
existence. The ROC provides incorporation certificate which is conclusive
evidence of the existence of any company. A company, once incorporated,
cannot cease unless the name of the company is struck-off from the register of
companies.
o Among other functions, it is worthy to note that the Registrar of Companies
could also ask for supplementary information from any company. It could
search its premises and seize the books of accounts with the prior approval of
the court.
o Most importantly, the Registrar of Companies could also file a petition for
winding up of a company
⮚ PCL (packing credit limit) AND FDBP: Bills (regarding purchase of equipment or
material) are purchased by the borrower and the payment is made by the bank. Once the
purchase of desired equipment or material is done , the bill requirements of banks have to
be meet.(Foreign Documentary Bill Purchase Payment Made To A Customer Through
Purchase/Negotiation Of A Foreign Documentary Bills Falls Under This Head. This
Temporary Investment Is Adjustable From The Proceeds Of The Shipping/Export
Documents.)
⮚ INSPECTION AUDIT COMMENTS; Banks should introduce a sound system of
internal audit. With a view to strengthening the credibility of the inspection system in
detecting cases of frauds/malpractices, steps need to be taken to gear up the
inspection/audit machinery and to improve the quality of officers of the inspection
department. There are certain audits (internal and external audit conducted by bank as well
as per RBI norms) including concurrent audits(Concurrent audit means doing the
examination of the financial transactions at the time of happening or parallel with the
transaction. It is part of a bank’s early warning system to ensure timely detection of
irregularities and lapses. It helps in preventing fraudulent transactions at branches), RBI
audits etc
⮚ BUYERS CREDIT AND BILLS DUE: Buyer's credit is a short-term loan facility
extended to an importer by an overseas lender such as a bank or financial institution to
finance the purchase of capital goods, services, and other big-ticket items. Any credits has
to be given to buyers or any dues of bills will be met by the bank to ensure safe business
so as to avoid risk in repayment of loan.
⮚ STOCK AUDIT REPORTS:Stock-taking or "inventory checking" or "wall-to-wall" is
the physical verification of the quantities and condition of items held in an inventory or
warehouse. stock audit shall be conducted at least annually during the second half of every
financial year in respect of all working capital limits of 5 crore and above secured by stock
so that the audit report shall not be older than 6 months as on balance sheet date.people
having credit above five crore has to submit a stock statement every year and bank have to
verify with the stock statement obtained already.

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 ⮚ MIS REPORTS :
● MIS reports regarding the advance portfolio is closely monitored by the credit monitoring
officers that they can evaluate the quality of each and every loans belonging to their
products.
 DASHBOARD DATA
● A Data Dashboard Is An Information Management Tool That Visually Tracks, Analyzes
And Displays Key Performance Indicators (KPI), Metrics And Key Data Points To Monitor
The Health Of A Business, Department Or Specific Process.
● Each borrower in the dashboard data will be given a color like yellow, red etc according to
the level of risk.
⮚ LMS (loan management system)- godown inspection:
● Go-down inspection is the inspection of stock details
● LMS provide Customer 360, where all information about customer including their loan
details, details about banks they have charges, RM details, branch where loan has been
sanctioned etc.
⮚ SAVE RISK

● Save risk helps you measure risk against your counterparty by providing detailed risk
assessment services.

● The legal footprint of each corporate/individual is scrutinized across all courts in the
country ranging from district courts, tribunals till the apex court of the country.

● These litigations are measured based on severity helping you gauge both behavioral and
financial risk. inaddition, the same data is triangulated based with financial ratios and key
rating recommendations thus giving one a holistic view.

● Save risk includes review or details about the company including its name ,type of
company, roc registered etc. are informed in save risk
● Media details, ie any news regarding the company will be informed in save risk site
● Also legal cases, research details or reports, director’s details etc were informed in the site
so as to evaluate the risk.

5.82 TERM LOANS

⮚ Connected Accounts
⮚ Process Note
⮚ Scheme Adherence
⮚ Disbursal
⮚ Auto Recovery
⮚ DPD (Days Past Due (DPD) Arrears
⮚ Security-Primary & Collateral, Insurance

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 ⮚ CERSAI:
⮚ Implementation/ Completion
⮚ SMA/ NPA History
⮚ ROC For Pvt Ltd Companies
⮚ Breach Of Sanction Order Condition
⮚ Inspection Audit Comments
⮚ Completion- Adherence To DCCO (Date of Commencement of Commercial Operations),
Unit Visit Report
⮚ Credit Rating Review-Yearly (Internal And External)
⮚ Buyers Credit And Bill Dues
⮚ MIS Reports/ Dashboard Data
⮚ Save Risk
⮚ Documents

ASSESSMENT OF TERM LOAN TOOLS

⮚ CONNECTED ACCOUNTS: While analyzing a Working capital loan in the specified

portfolio (customer exposure above 5 Cr) analysis of all connected accounts/ limits in the
name of customer with bank (including Fund based as well as Non funded based limits).
Anomalies/irregularities noted in all those connected accounts will be treated EWS for the
major limits availed by the customer from Bank. The whole accounts shall be listed as
NPA due to the slippage of any one of the connected accounts. Hence analysis of connected
accounts will be conducted with high importance and due diligence. To ensure the
repayment, bank will make sure that the borrower has no such current account in any other
banks, no diversion of funds etc .
⮚ PROCESS NOTE: The relationship manager/ Branch will submit the proposal through
CLAPs which include
● Customer profile
● Gist Of proposal
● CIBIL /CRISIL rating
● Activities of borrower
● Banking Arrangements
● Securities and apportioning
● Assessment of limits
● Partners/ Co-obligant (a person who promises or is obliged to pay a sum or carry out a
task.) details
● B/S or financial figures
● Appraisal note is a summary of loan which includes the consolidation of above mentioned
assessments consolidated figures, margin and detail about security of loan.

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⮚ SCHEME ADHERENCE: Different schemes and their compliance with scheme norms
by the borrower as well as the bank( pre sanction and post sanction conditions) were
examined
⮚ DISBURSAL: Disbursal of loan is the last stage in the loan process. It refers to the transfer
of the money from the financial institution to the borrower’s bank account. It is only after
the disbursal of the loan that the amount is accessible to you for usage. Bank will not
provide the borrower the entire amount of loan at a time but there shall be a proper disbursal
of loan based on certain criteria. Proper disbursal of loan has been ensured.
⮚ AUTO RECOVERY: The normally recovery depends on the purpose, time and condition,
business running process etc.SB a/c information provided to the borrower
⮚ DPD :Days Past Due (DPD) When you apply for a loan or credit card with any of the
banks or financial institutions, the institution checks your credit history to ascertain your
credit worthiness / Arrears
⮚ SECURITY-PRIMARY & COLLATERAL, INSURANCE: The security for bank
credit for operating capital functions is inside the shape of:
1.Goods/shares which consist of uncooked substances, work-in procedure, completed
goods, consumables spares and stores.
2.Accounts receivable or e book debts.
Three. Bills of exchange drawn by using the purchaser on its customer representing actual
trade transaction.
●Securing for financial institution credit might be inside the shape of an immediate
protection or an indirect security.
●Direct protection includes the stocks and receivables of the customers on which a fee is
created via the bank via various security documents.
● If inside the view of the financial institution, the primary or direct protection isn't
considered good enough, or is hazard-susceptible, that is situation to heavy fluctuations in
charges, fairness and so forth. The financial institution may additionally require extra
safety either from the consumer or from a third birthday party on behalf of the patron.
●The additional safety so obtained is known as ‘indirect’ or ‘collateral security’. The time
period collateral means going for walks parallel or together and collateral security is an
extra and/or separate safety for reimbursement of money borrowed.
●In case the customer is unable to offer extra safety when required by way of the financial
institution, he can be required to provide collateral security from a third birthday party. The
not unusual shape of third birthday celebration collateral security is a assure given by using
a person on behalf of the clients to the bank.
●The third birthday party collateral safety in flip may be secured or unsecured. For
example, in which the guarantor has completed a assure settlement simplest, the collateral
security is unsecured.

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 ● However, if he lodges together with the assure agreement protection consisting of name
deeds to his property creating mortgage by using deposit of name deeds with the bank, a
secured collateral safety is created
⮚ CERSAI: Ensure that the borrowers company should be registered under CERSAI in order
to avoid the risk in repayment
⮚ Implementation/ Completion
⮚ SMA/ NPA History: A non performing asset (NPA) is defined generally as a credit facility
in respect of which interest and / or installment of principal has remained “past due” for
two quarters or more. Corrective Action Plan to Arrest Increasing NPAs by RBI
✔ Early Recognition of Stress and Setting up of Central Repository of Information on Large
Credits (CRILC)
✔ Before a loan account turns into an NPA, banks are required to identify incipient stress in
the account by creating a sub-asset category viz. ‘Special Mention Accounts’ (SMA) in
terms of RBI Circular.
✔ Banks would henceforth be required to have three sub-categories under the SMA category
as given in the table below
⮚ ROC For Pvt Ltd Companies: when a company is liquidating its operations its partners
may distribute the charges among them.This is a risk for the WC loan providing bank.If
the bank ensures that the company has been registered with ROC, the borrower has to first
pay the charges of the bank before distributing charges among themselves
⮚ Breach Of Sanction Order Condition : Ensure how the borrower comply with the order
⮚ Inspection Audit Comments
⮚ Completion- Adherence to DCCO (Date of Commencement of Commercial
Operations), Unit Visit Report: Project loan would mean any term loan which has been
extended for the purpose of setting up an economic venture. Bank shall fix a Date of
commencement of commercial operations for all project loans at the time of sanction of
the loan/ financial closure. DCCO shall be clearly documented and mentioned in the
sanction order and entered in the system while opening the account.
⮚ Credit Rating Review-Yearly (Internal And External)
⮚ Buyers Credit And Bill Dues: Any credits has to be given to buyers or any dues of bills
will be met by the bank to ensure safe business so as to remove risk in repayment of loan.
⮚ MIS Reports/ Dashboard Data
⮚ Save Risk
⮚ Documents

5.83 NON FUND BASED

⮚ BG Invoked Outstanding
⮚ LC Devolved

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ASSESSMENT OF NON FUND BASED

⮚ BG INVOKED OUTSTANDING-

● A bank guarantee is a promise for non-performance. In bank guarantee, a bank

guarantees any work that has to be performed failing which the bank promises to
pay the dues.

● Bank shall apply the same diligence while appraising Non-fundbased exposure as
is done in the case of fund based exposure. Charge on assets, if available, should
be extended to non-fund based limits also.

● In case of financial guarantees, it shall be ensured that the persons on whose behalf
the guarantees are issued will be in a position to honor their commitments out of
their own resources in case the guarantee is invoked.

● In the case of performance guarantees, it should be endured that the customer has
the necessary experience, capacity and means to perform the obligations under the
contract and is not likely to commit any default.

● Minimum margin- all guarantees issued on behalf on stock commodity brokers

favoring stock and commodity exchange. Banks are required to obtain a minimum
margin of 50% (out of which cash margin to be 25%) while issuing such guarantees,
the total volume of guarantee obligations outstanding at any time may not exceed
10 percent of the total owned resources of the bank comprising paid up capital,
reserves and deposits.

● All the instructions/ guidelines on KYC/AML/CFT/ obligation of banks under

PMLA as applicable to banks.

⮚ BANKS CAN ISSUE GUARANTEES FAVOURING OTHER BANKS/ FIS.

● The guarantee shall be extended only in respect of borrower constituents and to enable
them to avail of additional credit facility from other banks/FIs/lending agencies.

● It is to be treated as an additional exposure on them and the same will attract appropriate
risk weight as per extant guidelines.

● The guaranteeing bank should assume a funded exposure of at least 10% of the exposure
guaranteed.

● Banks should not extend guarantees or letters of comfort in favour of overseas lenders
including those assignable to overseas lenders.

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● Banks should not issue guarantees or equivalent commitments for issuance of bonds or
debt instruments of any kind by corporate entities

⮚ LC DEVOLVED OUTSTANDING
● Document issued by the bank that guarantees payment for goods or services when the seller
provides acceptable documentation
● Irrevocable LC is that LC which cannot be modified or cancelled without the consent of
the seller which reflects the absolute liability of buyer.
● Letter of credit issued by the bank shall be irrevocable. LC limit shall be treated as part of
WC limits unless it is sanctioned for capital expenditure.
● Proper assessment of cash flow shall be done while sanctioning LC facility to ensure that
the borrower will be able to meet the LC liability on the due date.
● LC shall be issued only for genuine business purpose. The LC limit sanctioned shall be in
line with the borrowers turnover, inventory levels, value of goods produced/imported etc

⮚ CO-ACCEPTANCE OF BILLS

● Co-acceptance is a means of non-fund based import finance whereby a Bill of

Exchange drawn by the exporter on the importer is co-accepted by a Bank. By co-
accepting the bill of exchange, the Bank undertakes to make payment to the exporter
even if the importer fails to make payment on due date.

● Limits for co-acceptance of bills will be sanctioned by the banks after detailed appraisal
of customer's requirement is completed and the bank is fully satisfied about the
genuineness of the need of the customer. Further customers who enjoy other limits with
the bank should be extended such limits.

● Only genuine trade bills shall be co-accepted and the banks should ensure that the
goods covered by bills co-accepted are actually received in the stock accounts of the
borrowers. The valuation of goods as mentioned in the accompanying invoice should
be verified to see that there is no overvaluation of stocks.

● The banks shall not extend their co-acceptance to house bills/ accommodation bills
drawn by group concerns on one another.

● Before discounting/purchasing bills co-accepted by other banks for Rs.2 lakh and
above from a single party, the bank should obtain written confirmation of the concerned
controlling office of the accepting bank.

● When the value of total bills discounted/purchased (which have been co-accepted by
other banks) exceed Rs.20 lakh for a single borrower/ group of borrowers prior

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 approval of the Head Office of the co-accepting bank shall be obtained by the
discounting bank in writing.

● Banks are precluded (prevented from) from co-accepting bills drawn under Buyer's
Line of Credit schemes of financial institutions like IDBI(IndustrialDevelopmentBank
of India), SIDBI(small industries development bank of India),PFC(power finance
corporation ltd) etc. Similarly banks should not co-accept bills drawn by NBFCs.
Further, banks should not extend co-acceptance on behalf of their buyers/constituents
under the SIDBI scheme.

● However, banks may co-accept bills drawn, under Seller's Line of Credit schemes for
Bill Discounting operated by the financial institutions like IDBI, SIDBI, and PFC etc.
without any limit subject to buyer's capacity to pay and the compliance with exposure
norms applicable to the borrower.

● Where banks open L/C and also co-accept bills drawn under such L/C, the discounting
banks, before discounting such co-accepted bills, must ascertain the reason for co-
acceptance of bills and satisfy themselves about the genuineness of the transaction.

● Co-acceptance facilities will normally not be sanctioned to customers enjoying credit

limit with other banks.

⮚ BILL DISCOUNTING
FEDERAL BANK provides extension of working capital finance to suppliers under LC or Invoice
discounting. Facility is provided to mid / large corporates having turnover of Rs.500 Crores
and above OR minimum exposure (Funded + Non Funded) of Rs.25 Crores Period of the
facility is up to 180 days
● SIGHT BILL DISCOUNTING
● USANCE BILL DISCOUNTING (Usance Bill is the one which is expressed to be payable
after a specified period (Usance) mentioned in the bill)
● INVOICE (Under Invoice Financing, the lending bank agrees to purchase a company's
outstanding invoices (debtors) which are payable over a period of time, on an ongoing
basis, and then provides funding by way of prepayment of invoice value of the approved
debt. )
● LC Bill Discounting: Bank offers the LC Bill Discounting facility to its customers
Requirements:
✔ The bills should be drawn under irrevocable Letter of Credits issued by a Commercial Bank in
India.

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✔ The Bills drawn are in strict conformity with the terms of the LC.
✔ Bills of exchange should have arose out of bonafide commercial or trade transactions
⮚ EXPORT PRE SHIPMENT CREDIT
● Pre-Shipment finance refers to the credit extended to the exporters prior to the shipment of
goods for the execution of the export order.
● Bank is extending Pre shipment credit (Packing Credit) to exporters for purchasing,
processing, manufacturing and packing of goods prior to shipment. \
● Generally, the amount of packing credit does not exceed the FOB value of the goods to be
exported or their domestic value whichever is less.
● It is extended to the Indian exporters or deemed exporters from India. Individuals, Firms,
Companies or any other legal entity engaged in export of goods can avail this facility.
● It is extended in the following forms: Extended Packing Credit Loan; Packing Credit Loan
(Hypothecation and Pledge);Secured Shipping Loan;
● It is generally extended by commercial banks in India
⮚ EXPORT POST SHIPMENT CREDIT
● Post shipment credit is a loan or advance granted or any other credit provided by the Bank
for export of goods/services from India.
● For demand bills, the period of advance will be the Normal Transit period (as specified by
FEDAI).
● For usance bills, the period of advance will be usance period of the bill plus Normal Transit
period, if applicable and grace period, if any.
● Documents of title to goods exported will be treated as security.
● Post shipment credit should normally be liquidated by the proceeds of export bills received
from abroad in respect of goods exported/services rendered.
● The exporter has the option to avail pre shipment credit and post shipment credit either in
rupees or in foreign currency. However if the pre shipment credit has been availed in foreign
currency, the post shipment credit has also to be availed in foreign currency.

⮚ ISSUE OF GUARANTEES BY AN AUTHORISED DEALER

✔ An authorized dealer may give a guarantee in respect of any debt, obligation or other
liability incurred by a person resident in India and owned to a person resident outside India,
where the debt, obligation or other liability is incurred by a person resident in India as an
exporter, on account of exports from India.
✔ Long Term Export Advances’, eligible exporters were allowed to receive long term export
advance to be utilized for execution of long term supply contracts for export of goods.
✔ Such exporters were also allowed to use such export advances to liquidate rupee loans
which are not classified as non-performing assets as per the Reserve Bank of India asset
classification norms, subject to certain conditions.

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 ✔ In this connection, it is reiterated that export performance guarantees, where permitted to
be issued, shall strictly be in the nature of performance guarantee and shall not contain any
clauses which may in effect allow such performance guarantees to be utilised as financial
guarantees/Standby Letters of Credits.
✔ It has been observed that the facility of long term export advances is primarily being
utilised for refinancing rupee loans of borrowers instead of being used for execution of
long term supply contracts for export of goods.
✔ In order to ensure that long term export advances are used for the intended purpose, it is
advised that while eligible Indian companies may continue to avail of the facilities
available to them under the guidelines mentioned in the above paragraphs, any
repayment/refinancing of rupee loans with foreign currency borrowings/export advances,
where permitted, will be subject to the following conditions:
✔ If the foreign currency borrowings/export advances, where permitted under the guidelines
issued under the Foreign Exchange Management Act are obtained from lenders who are
not part of the Indian banking system without any support from the Indian banking system
in the form of Guarantees/Standby Letters of Credit/Letters of Comfort etc., the same may
be utilized to refinance/repay loans availed from the Indian banking system.
✔ If the foreign currency borrowings/export advances are obtained:

i. from lenders who are part of Indian banking system (where permitted); or
ii. with support (where permitted) from the Indian banking system in the form of
Guarantees/Standby Letters of Credit/Letters of Comfort, etc.;

✔ It is further advised that repayment/refinancing of foreign currency borrowings

outstanding with a bank, by way of rupee loans or another foreign currency loan
(where permitted) or based on support (where permitted) in the form of
Guarantees/Standby Letters of Credit/Letters of Comfort, etc. from lenders who are
part of Indian banking system would also be governed by the prudential guidelines
stipulated.
✔ Chief among the benefits of using bank guarantees is that they grant an absolute
guarantee of performance and payment to the exporter in international trade deals.
✔ With a bank guarantee in a cross-border trade transaction, the exporter no longer bears
any payment default risk.
✔ With no risk of default and the exporter feeling much more secure with the transaction,
an importer is in a much better position to negotiate favorable deal terms.
✔ Bank Guarantees provide comfort to exporters who get an absolute guarantee of
payment
⮚ IMPORT CREDIT

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 ✔ Import credit is a credit facility that an importer has with a bank in the country where it
resides. The exporter that sends goods to the importer and can draw bills of exchange from
that bank. In other words, import credit is a loan facility that an importer has with a lender.
That lender is usually a bank.
✔ Buyer's credit is a short-term loan facility extended to an importer by an overseas lender
such as a bank or financial institution to finance the purchase of capital goods, services,
and other big-ticket items.
✔ The importer, to whom the loan is issued, is the buyer of goods, while the exporter is the
seller.
✔ Buyer’s credit is a very useful financing method in international trade as it gives importers
access cheaper funds compared to what may be available locally.
✔ Import financing is a specialized segment of trade finance that exclusively provides
financing for imports.
✔ Import financing includes a variety of financial products and financial services that have
in common the similar purpose or objective of providing the international financing and
methods of payment that are needed to purchase and import goods from another country.
✔ Examples of import financing include import letters of credit, import bank guarantees,
bank instrument monetization, open accounts and consignment purchases, all of which are
offered by Global Trade Funding.

 IMPORT BANK GUARANTEES

✔ Bank Guarantees are the perfect method of import financing, providing protection to both
importers and exporters in cross-border trade.
✔ Bank Guarantees offer an absolute guarantee of performance and payment to the exporter, who
then bears no further payment default risk, which positions the importer to negotiate more
favorable deal terms.
✔ Bank Guarantees just may be the perfect method of financing import trade. They offer
numerous benefits, protecting both importers and exporters in cross-border trade transactions.
✔ Importer almost certainly gains the ability to negotiate favorable trade terms
✔ Bank Guarantees give small businesses immediate acceptance in global trade deals
» They are universally accepted, giving importers the leverage to buy anywhere in the world
» They eliminate payment default risk which gives importers and exporters flexibility in
negotiating terms

 IMPORT LETTERS OF CREDIT

✔ Import Letters of Credit are the most common import financing methods, offering
protection to importers and exporters in cross-border transactions.

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 ✔ They offer numerous benefits, primarily a guarantee of payment to the exporter, who then
no longer bears payment default risk, which positions importers to negotiate favorable deal
terms.
✔ Import Letters of Credit are the most common method of import financing.
✔ They are versatile, secure and can be used to finance any import transaction.
✔ An Import Letter of Credit is a financial instrument issued by a bank that represents the
commitment of the bank, on behalf of an importer that guarantees payment will be made
to the exporter provided the terms and conditions specified in the Letter of Credit have
been met.
✔ Conditions specified in Import Letters of Credit are typically evidenced by the presentation
of documents. Since they are credit instruments, issuing banks rely on the credit-worthiness
of importers when issuing Import Letters of Credit.

 TRADE CREDITS FOR IMPORT INTO INDIA

✔ Trade credits (TCs) refer to the credits extended by the overseas supplier, bank, financial
institution and other permitted recognized lenders for maturity for imports of capital and
non-capital goods permissible.
✔ Depending on the source of finance, such trade credits include suppliers’ credit or buyers’
credit.
✔ Suppliers’ credit relates to credit for imports into India extended by the overseas supplier,
while buyers’ credit refers to loans for payment of imports into India arranged by the
importer from a bank or financial institution outside India for maturity of less than three
years.
✔ It may be noted that buyers’ credit and suppliers’ credit for three years and above come
under the category of External Commercial Borrowings (ECB) (External commercial
borrowing (ECBs) are loans in India made by non-resident lenders in foreign currency to
Indian borrowers.) which are governed by ECB guidelines.

1. Purpose
Earlier circulars were not explicit about whether units based in SEZ (Special Economic Zone) can
avail trade credit. Reason being, as per SEZ Act 2005, SEZ is not part of India and for availing
trade credit it was necessary that goods were imported into India. In the revised guidelines, Trade
Credits can be raised for the purpose of import of non-capital and capital goods

● Within a Special Economic Zone (SEZ) or

● From a different SEZ

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 ● As both of the above are allowed, it can be interpreted that trade credit can also be availed
by SEZ against import from outside India.

2. Amount of Borrowing
Without RBI approval, importers can now raise trade credit up to USD 50 Million equivalent per
import transaction. Earlier limit was USD 20 Million.

3. Recognized Lender
Earlier the circular limited trade credit lenders to Overseas suppliers, banks and other financial
institutions. With revised circular foreign equity holders and financial institutions
in International Financial Services Centres (IFSCs) in India are added as recognized lender.

No clear process / structure on funding and prepayment is provided on transaction funded through
foreign equity holder. Also how will tracking and reporting mechanism work.

5. Security and Guarantee

Now borrower may provide security to the lender / suppliers, as specified by the RBI from time to
time. The borrower may also provide corporate and / or personal guarantee as security for the
borrowing subject to terms and conditions as specified by the RBI

 FORWARD CONTRACT

✔ Forward are over the counter derivatives that enable the buying or selling of an underlying
security on a future date on an agreed price
✔ The terms of forward contract has been agreed between counterparties and include the
underlying that is being bought or sold, the quantity of underlying, the price agreed upon
by the two parties and the date of settlement.
✔ There is an obligation for the buyer to pay for what has been bought and receive delivery
thereof and for the seller to give delivery of what has been sold and receive payment for
the same
✔ The actual price at the time of settlement may differ from the price that was agreed up on
✔ If the market price at the time of settlement of contract is greater than the agreed upon
price, the buyer gains but the seller losses. If the price is lower, the buyer losses but the
seller gains

 FOREIGN CURRENCY LOANS

✔ Introduction: Foreign currency loan refers to the loan granted by the bank through the
self-raising foreign currency fund, including five types of foreign currency, USD, EUR,
GBP, JPY and HKD.
✔ Features

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1. It covers a comprehensive range of usage with main use of meeting customer's demands for
foreign currency financing, including enterprises' demands for working capital and for fixed asset
investment.

2. According to customer request, its lending interest rate can apply either floating rate or fixed
rate. If required, the rate can be swapped from floating rate to fixed rate.

3. Compared with foreign government loans and buyer's credit of foreign banks, our bank's foreign
currency loan can be more widely used and help customers purchase equipments and materials
from foreign countries.

✔ Currency Type

Five types including USD, EUR, GBP, JPY, HKD.

✔ Interest Rate

The lending interest rate can apply either floating rate or fixed rate. If required, the rate can be
swapped from floating rate to fixed rate.

✔ Charges

All fees concerning foreign currency loan should be charged according to the loan contract.

✔ Target Customers

Foreign currency loan is only available to enterprises. Economic entity with enterprise legal person
qualification and loan repayment ability, an account of Bank of China, can apply for it.

✔ Application Qualifications

1. Borrowers should be the enterprise (the undertaking) legal person, other economic organization,
individual businesses approved by the industry and commerce administration authorities (or the
competent authorities), with business license issued by the above authorities;

2. Funds must be used in legal, reasonable and profitable area;

3. The borrower should have foreign currency funds source, if not, it should have certificate of
foreign exchange purchase for loan repayment, approved by the foreign exchange administration
department;

4. Other relevant requirements of Bank of China.

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5.84 NEWLY OPENED TERM LOANS

⮚ CLAPS: PROCESS NOTE- CLAPS- CENTRALIZED LENDING AUTOMATION

PROCESSING SYSTEM
⮚ Money Trail
⮚ Auto recovery
⮚ Documents
⮚ Arrears
⮚ Insurance
⮚ CERSAI
⮚ C124
⮚ ROC

ASSESSMENT OF NEWLY OPENED TERM LOANS

⮚ CLAPS: PROCESS NOTE- CLAPS-centralized lending automation processing system

through which the relationship manager will send the details about loan through CLAPs
which includes
● Borrows profile
● CIBIL /CRISIL rating
● Activities of borrower
● Partners detail
● B/S or financial figures
⮚ MONEY TRAIL: Series of connected financial transactions and exchanges, especially
when revealed during the investigation of a crime.)
⮚ AUTO RECOVERY: SB a/c information provided to the borrower
⮚ Documents
⮚ Arrears
⮚ INSURANCE: Ensure the insurance of primary security, mostly stock, to avoid risk when
the security has been destroyed or damaged.
⮚ CERSAI: Ensure that the borrowers company should be registered under CERSAI in order
to avoid the risk in repayment
⮚ C124: Ensure the compliance of post disbursement conditions. This can be verified by the
use of LMS.
⮚ ROC: when a company is liquidating its operations its partners may distribute the charges
among them. This is a risk for the WC loan providing bank. If the bank ensures that the
company has been registered with ROC, the borrower has to first pay the charges of the
bank before distributing charges among themselves

5.85 NEWLY OPENED ODCCS (OVERDRAFT CASH CREDIT A/C)

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 ⮚ CLAPS: PROCESS NOTE- CLAPS- CENTRALIZED LENDING AUTOMATION
PROCESSING SYSTEM
⮚ Money Trail
⮚ Stock Statements
⮚ Insurance
⮚ Documents
⮚ Routing.
⮚ TOD/ADhoc
⮚ CERSAI
⮚ ROC

ASSESSMENT OF NEWLY OPENED ODCC

⮚ CLAPS: PROCESS NOTE- CLAPS- CENTRALIZED LENDING AUTOMATION

PROCESSING SYSTEM
● The relationship manager will send the details about loan through CLAPs which include
● Borrows profile
● CIBIL /CRISIL rating
● Activities of borrower
● Partners detail
● B/S or financial figures
⮚ MONEY TRAIL: A Series Of Connected Financial Transactions And Exchanges,
Especially When Revealed During The Investigation Of A Crime.)
⮚ Stock Statements
⮚ INSURANCE: Ensure the insurance of primary security, mostly stock, to avoid risk when
the security has been destroyed or damaged.
⮚ DOCUMENTS
⮚ ROUTING: proper routing of borrowers account so as to identify the situation of his/her
business and thereby avoiding the risk in repayment of loans.
⮚ TOD/ADhoc
⮚ CERSAI: Ensure that the borrowers company should be registered under CERSAI in order
to avoid the risk in repayment
⮚ ROC: when a company is liquidating its operations its partners may distribute the charges
among them.This is a risk for the WC loan providing bank.If the bank ensures that the
company has been registered with ROC, the borrower has to first pay the charges of the
bank before distributing charges among themselves

5.9 ONE TIME SETTELEMENT FOR STANDARD ASSETS- A ROLE OF CRMD

The Reserve Bank of India (RBI) on January 1, 2019 introduced a one-time restructuring scheme
for micro, small and medium enterprises (MSMEs) with a maximum exposure of Rs 25 crore. The

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restructuring has to be implemented by March 31, 2020. Banks have to incur an additional
provision of 5 per cent for these restructured accounts as per RBI.

As part of credit portfolio management, bank has a system to incentivize a self-exit route for
standard assets which shows signs of sickness due to various reasons. Bank may consider allowing
one time settlement in standard assets, in respect of loans and advances having incipient
weaknesses such as deterioration in the credit rating of the borrower to unacceptable levels,
symptoms of weaknesses in business or activity, unit not running satisfactorily, business
projections not achieved for continuous periods, fall in profit continuously, serious deterioration
in financial ratios, not submitting stock statements on time, frequent cheque returns, delay in
servicing interest etc.

As a general rule, barring the above one-time exception, any MSME account which is restructured
must be downgraded to NPA upon restructuring and will slip into progressively lower asset
classification and higher provisioning requirements. Such an account may be considered for
upgradation to ‘standard’ only if it demonstrates satisfactory performance during the specified
period. ‘Specified Period’ means a period of one year from the commencement of the first payment
of interest or principal, whichever is later, on the credit facility with longest period of moratorium
under the terms of restructuring package. ‘Satisfactory Performance’ means no payment (interest
and/or principal) shall remain overdue for a period of more than 30 days. In case of cash credit /
overdraft account, satisfactory performance means that the outstanding in the account shall not be
more than the sanctioned limit or drawing power, whichever is lower, for a period of more than 30
days. The restructured accounts need to be disclosed. Banks and NBFCs should have board-
approved policies on restructuring.

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6. LEARNING FROM THE INTERNSHIP

FEDERAL BANK Limited is a first-rate Indian commercial financial institution inside the non-
public area. It is characterized by means of its digital products consisting of fed-mob, fed-net, fed-
ebook selfie and Lotza UPI and so on. The predominant goal of the undertaking is to discover the
significance of FEDERAL BANK’s credit score monitoring branch in keeping NPA (non-
performing asset). To conclude this allows us to have a take a look at the brand new economic
result (first area result of FY20).

The Operating Profit of the Bank as on 30th June 2019 stood at Rs. 782.76 Cr up from Rs. 602.92
Cr. The Total Income grew 23.23% Y-o-Y to reach Rs.3620.84 Cr. The Net Profit of the Bank as
at the end of the current quarter stood at Rs. 384.21 Cr registering a Y-o-Y growth of 46.25%.
Gross non-performing assets as a percentage of gross advances increased to 2.99 percent, from
2.92 percent in the previous quarter and net NPAs, too, were higher at 1.49 percent against 1.48
percent sequentially. Market share shows a decrease with a value of 81.80 as on 28 august 2019
of stock price.

From the challenge it's far concluded that a CREDIT MONITORING DEPARTMENT is vital to
keep the first-rate of the property and to get better the hobby and other dues in time .Credit
monitoring allows to take important steps to prevent slippage of the bills to sub-preferred and NPA
category. Credit tracking department pick out EWS to ensure the well timed compensation of
loans. Close tracking is referred to as for to save you the account from becoming a NPA. Weakness
in credit appraisal and credit monitoring has been identified as essential motives for the bills
turning into non-performing assets. It wishes hardly ever to be emphasized that until monitoring
is carried out correctly, it's far not possible to manipulate slippage of fashionable asset to NPAs
.Credit tracking branch assist to keep excessive credit excellent and controlling boom of confused
belongings.

Asset Quality of the franchise showed marked progress and the Bank recorded highest ever
Recovery/Upgrades and in conjunction with a substantial discount in slippages, it resulted inside
the Gross NPA and Net NPA enhancing. Advances are categorized into acting belongings
(Standard) and nonperforming assets ('NPAs') as consistent with the RBI tips and are said internet
of bills rediscounted, inter-financial institution participation certificate issued with risk sharing,
unique provisions made in the direction of NPAs, floating provisions and unrealized hobby on
NPAs. Interest on Non Performing advances is transferred to an unrealized hobby account and not
identified in income and loss account till received. Further, NPAs are categorized into sub-
fashionable, dubious and loss belongings based totally at the criteria stipulated by means of the
RBI. The Bank has made provision for Non-Performing Assets as stipulated under Reserve Bank
of India norms.

Credit tracking branch and its effectiveness contribute to banks monetary end result. Total
advances of the bank have been will increase in an usual foundation. From financial evaluation of

90
FEDERAL BANK it's far obtrusive that there may be a decrease in marketplace percentage (eighty
three.Eighty) and an negative NPA function. This has enabled the credit monitoring department
work extra effectively with a purpose to maintain asset best.

Macro degree factors inclusive of slowdown in monetary increase, imbalances in the economic
system, stress in sure industries and many others and micro degree factors consisting of terrible
underwriting standards, vulnerable restoration mechanism and many others are few elements that
contribute to the credit score chance of a financial institution. FEDERAL BANK has a centralized
credit risk management division impartial of its business capabilities to control the credit hazard.
Appropriate credit underwriting requirements, chance mitigation approaches, post- disbursement
tracking, robust series and recuperation mechanism and well-timed remedial actions make sure
that credit danger is contained inside ideal stage. The bank monitors its exposures on a day by day
foundation to make sure that there are no breaches inside the publicity ceilings constant by way of
the Board. A research and analytics wing capabilities within the Risk Department for engaging in
portfolio studies, industry/area evaluation and to seize up-to- date marketplace records.

FEDERAL BANK has strong credit appraisal and risk assessment practices in place for
identification, measurement, monitoring and control of the credit risk exposures. FEDERAL
BANK uses CRISILs Risk Assessment Models (RAM) and CRISIL Retail Scoring System
(CRESS) scorecards for assessing credit risk under different exposure segments. FEDERAL
BANK is continuously reviewing and validating the credit rating models / scorecards for its
appropriateness and productiveness. Migration studies and default rate analysis based on the credit
risk rating provide input for policy decisions on credit deployment, pricing and monitoring of
credit portfolios. Credit risk management in FEDERAL BANK, through its various policies, risk
assessing tools and risk mitigating measures ensures robust credit growth with superior asset
quality. Currently, credit risk capital is computed using the standardized approach. RBI guidelines
on Basel III capital regulations have been implemented and FEDERAL BANK is sufficiently
capitalized as per the requirements under Basel III.

Commenting on the results and financial performance, The Bank has delivered yet another strong
operating performance, driven largely by an all-time high in operating profit and net profit. Credit
growth has been stable and has had the right mix of both caution and control largely influenced by
a very volatile external environment. On the liability front, we have gained share in what has been
arguably one of the toughest operating environments for liabilities. The Bank continues to exercise
strict vigil on the NPA front, and was able to keep it under check

Bank has put in place a detailed Credit Risk Management Policy. The objective of this policy is to
create a transparent framework for identification, assessment and effective management of credit
risk in all operations of the Bank and to secure organizational strength and stability in the long run.
The policy aims at contributing to the Bank’s profitability by efficient and profitable utilization of
a prudent proportion of the Bank’s resources and maintaining a reasonably balanced portfolio of
acceptable risk quality through diversification of credit risks. The policy also envisages optimizing

91
returns with satisfactory spread over funding cost and overheads. The policy deals with the
structure, framework and processes for effective management of inherent credit risk.

The Bank is exposed to credit risk in its lending operations. The Bank’s strategies to manage the
credit risks are given below:

a) Defined segment exposures delineated into Agriculture, Micro & Rural Banking, Retail,
MSME and Corporate.

b) Industry wise segment ceilings on aggregate lending by Bank across Branches.

c) Individual borrower wise and borrower group wise lending ceilings linked as a percentage to
the Bank’s capital funds as at the end of the previous year.

d) Borrowers are subjected to credit rating and loans are granted only to those borrowers falling
within defined thresholds of risk levels; the approach also includes diversification of borrowers
within defined thresholds of risk levels.

e) The business of the Bank is within India including the IFSC branch located in GIFT City,
Gujarat. In respect of certain industries; ceiling has been fixed for specific geographies with a view
to contain Concentration risk. In respect of cross border trade which would involve exposures to
banks and financial institutions located outside India, there is a geographic cap on exposures apart
from cap on individual bank / institution. Bank has also fixed ceiling for its foreign currency
exposures.

f) Bank has adopted a well-defined approach for sourcing and underwriting loan proposals. Proper
due diligence is carried out while sourcing fresh credit limits.

g) Credit sanctioning powers are granted as per Credit Delegation Policy based upon the amount
and riskiness of the exposure.

h) Regular review of all credit policies including exposure ceilings with due approval of Bank’s
Board of Directors.

i) Credit hub system is put in place to enhance the quality of credit appraisal and underwriting
process.

j) Specialized Credit Advisory Teams operating at strategic locations to streamline and monitor
credit processes within the credit hubs, evaluate and chart action plans to act on EWS, conduct
unit visit of stressed account and formulate other measures to maintain standard health
classification of credit exposures.

k) Dedicated Credit Monitoring Department at national level and other key geographies to monitor
/ follow up of performance of loans and advances.

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l) Credit Administration Department at central level and at other key geographies to ensure
compliance of documentation formalities and submission of post credit monitoring reports /
compliance of sanction order covenants.

m) Robust statistical score cards used for retail credit appraisal process.

n) Bank also uses the Behavioral / transactional models for monitoring and timely intervention of
retail borrowers.

o) Model validation done on a yearly basis to assess the discriminatory power of the model and
stability of the rating and do calibration.

p) Bank has laid down appropriate mechanism for ongoing identification, development and
assessment of expertise of officials in the area of credit appraisal, underwriting and credit
management functions.

q) Internal credit rating of all credit proposals above `5.00 Crores is confirmed by Integrated Risk
Management Department.

Asset quality protection is one of the main functions of credit monitoring department.

6.1 ASSET QUALITY PROTECTION

As federal bank is strictly adhering to its norms, the advances they provide are quality advances.
For instance “According to Srinivasan, the bank has decided not to lend to NBFCs below ‘A’
rating in order to preserve the quality of its loan book”.

Government bonds and T-bills are considered as good quality loans whereas junk bonds, corporate
credits to low credit score firms etc. are bad quality loans. A bad quality loan has a higher
probability of becoming a non-performing loan with no return.

ASSET QUALITY PROTECTION- FEDERAL BANK

To build and maintain a clean portfolio, the bank needs to periodically review and strengthen its
credit appraisal standards. Nevertheless, the credit quality of an asset may deteriorate over time
depending on various internal and external factors. Hence it is important that the bank should
initiate remedial steps at the right time when signals of credit weakness begin to emanate in order
to prevent any increase in the stresses asset portfolio. The success of remedial actions clearly
depends on the ability to catch the signals at the right time and take firm, quick and timely
corrective action plans.

The sanctioning authorities at all levels can decide to implement suitable remedial measures
including withdrawal from the relationship within their delegated powers if in their opinion the
performance or account operations of the borrower are unsatisfactory. Sanctioning actions based
on various factors such as developing growing stress in the accounts, deteriorating

93
industry/business conditions, worsening financial position, lack of ethical conduct management
etc.

Various corrective steps shall be considered after careful analysis of the account functioning of
business, managerial abilities, prospects of the industry, etc. Discussion with the borrower and unit
visit shall be conducted before taking decision on the future of the relationship like, continuing
concessions, if any , enhancement in existing limit, seeking additional collateral, etc.

Asset quality is one of the most critical areas in determining the overall condition of a bank. The
primary factor affecting overall asset quality is the quality of the loan portfolio and the credit
administration program. Loans typically comprise a majority of a bank's assets and carry the
greatest amount of risk to their capital. Securities may also comprise a large portion of the assets
and also contain significant risks. Other items which can impact asset quality are other real estate,
other assets, off-balance sheet items and, to a lesser extent, cash and due from accounts, and
premises and fixed assets. Management often expends significant time, energy, and resources
administering their assets, particularly the loan portfolio. Problems within this portfolio can
detract from their ability to successfully and profitably manage other areas of the institution.
Examiners should be diligent and focused when reviewing a bank's assets, as they can significantly
impact most other facts of bank operations.

Asset Quality

•GNPA and NNPA @ 2.99% and 1.49% respectively.

•Net Stressed assets at 1.67% of the average total assets.

The Gross NPA of the Bank as at the end of the quarter stood at Rs.3394.69 Cr, which as a
percentage to Gross Advances comes to 2.99%. The Net NPA as on 30th June 2019 stood at
Rs.1672.82 Cr, and the Net NPA as a percentage to Net Advances is at 1.49%.

In banking terminology, assets of a bank include all the different types of loans that it gives to
borrowers and other investments made by the bank in relatively risk-free instruments such as
government bonds, corporate bonds, etc.

The term asset quality implies the quality of loans that a bank has given out. A bank is said to have
good quality assets if loans given out by it are being repaid on time. Bad quality assets include
loans that are not being paid on time. An important measure of the asset quality of banks is the
metric Non Performing Assets (NPAs). NPAs are loans in which the interest, instalment or
principal have not been repaid for more than 180 days. Thus, a higher proportion of NPA implies
worse asset quality of a bank..

The most important reasons for rising NPAs have been insufficient appraisal of loan proposals and
also inadequate monitoring of the loans given out. Aggressive lending by banks to big corporate

94
houses are also to be blamed.In India, all of the above factors have contributed to rising NPAs.
Public sector banks contribute to the bulk of NPAs though the share of private banks, both
domestic and foreign, is also increasing in recent times.

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7. CONCLUSION

Bank has an effective CRMD for ensuring compliance of terms of pre-disbursement conditions,
keeping documents legally enforceable, end use of funds as per the loan agreement to prevent
diversion of bank funds, security offered to the bank. Bank has put in place an effective post-
sanction process to facilitate efficient and effective credit management and to maintain a high level
of standard assets. Credit Monitoring is an integral part of lending activity.

Bank has put in place Board approved comprehensive Credit Risk Management Policy. The policy
aims to provide basic framework for implementation of sound credit risk management system in
the Bank. It spells out various areas of credit risk, goals to be achieved, current practices and future
strategies. Bank has also operationalized required organizational structure and framework as
prescribed in the policy for efficient credit risk management through proactive identification,
precise measurement, fruitful monitoring and effective control of credit risk arising from its credit
and investment operations. The Risk Management Committee of the Board oversees Bank wide
risk management and senior executive level Credit Risk Management Committee monitors
adherence to policy prescriptions and regulatory directions. CRMC of the Bank meets at least once
a quarter (subject to a minimum of 6 meetings in a year) to take stock of Bank’s credit risk profile
based on the reports placed by Credit Risk Division of Integrated Risk Management Department.

So Credit monitoring is very essential in banks in monitoring of in the effective management of

lending .Most of the Banks have installed multiple monitoring mechanism and inspection at
different levels viz monitoring by branch managers, officers at controlling offices , audit
by external agencies ,RBI, CA firms ,internal audit by head office etc .Strategies and tools
currently making use by the credit monitoring officers in the concerned departments are highly
effective. Measures to improve the effectiveness in handling these tools are undergoing in a
continuous manner.

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8. REFERENCE

1.https://www.cbn.gov.ng/Supervision/crms.asp

2.https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9907&Mode=0

3.https://poseidon01.ssrn.com/delivery.php?ID=452119066123069019028113099118086071116
022007047022001077095104023123126121098017000107007021119049029017098083112111
096027113122012004035040070070123064001066017071068046086022025016003065099098
109091086124069071077066031101110112012099109125111069110&EXT=pdf

4.HDFC BANK OFFICIAL WEBSITE:

https://www.hdfcbank.com/assets/pdf/Investor_Presentation.pdf

5.IOB BANK OFFICIAL WEBSITE: https://www.iob.in/presentation_to_analysts

6.MONEY CONTROL WEBSITE: https://www.moneycontrol.com/

7.http://www.bankingfinance.in/concept-margin-working-capital-finance.html

8.http://elearning.nokomis.in/uploaddocuments/Corprate%20Banking/chp%204%20Cash%20Cr
edit/Summary/Chp_4.pdf

9.http://elearning.nokomis.in/uploaddocuments/Corprate%20Banking/chp%204%20Cash%20Cr
edit/PPT/Corporate%20Banking%20Chapter%204.pdf

10. RBI OFFICIAL WEBSITE: https://www.rbi.org.in

11. SAVE RISK SITE: https://saverisk.com/

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