Commercial Bank Funds Regulatory Process & Priority Sector Lending & Non Fund Facilities (2)

7/28/2019 Commercial Bank Funds Regulatory Process & Priority Sector Lending & Non Fund Facilities (2)

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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

COMMERCIAL BANKING FUNDS,

REGULATORY PROCESS &

PRIORITY SECTOR LENDING

A PRESENTATION

BYCA. R.C.AGARWAL


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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWALMANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

POST NINETIES

New

Economicpolicy

1991


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Privatisation of Financial Institutions

IFCI to IFCI Ltd., IDBI to IDBI Ltd. &

to IDBI bank

ICICI to ICICI bank Number of private banks set up

Govt. holding in banks diluted by more

than 40%


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Reorganisation of

Institutional Structure

Setting up of universal banks

One stop banking PSB Boards to have share

holder representatives


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Development in commercial banking

Demand for refinance has shrunk from

banks

Focus on Non fund based finance Capital adequacy, asset classification &

provisioning norms and accounting

standards made applicable to DFIs andFIs


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Development in commercial banking

Financial services such as Merchant banking, Project counseling,

Portfolio management, Credit syndication, New issue management, Mergers and acquisitions,

Corporate advisory services, Debenture trusteeship, Sponsorship of mutual funds etc.


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Commercial Banks

Economic environment Statutory Liquidity Ratio (SLR) 38.5% , Cash Reserve

Ratio (CRR) 15% + 10% (incremental ratio) of netdemand & time liabilities (NDTL)

CRR now is 6% SLR is 24% Item / Week Ended 2007 2008 2009 2011

Sep. 7 Aug. 1 Sept. 5 July 26

Cash Reserve Ratio 7.00 8.75 9.00 6

Lower intt. on SLR and CRR Directed credit programmes to Priority sector Narsimham committee-I


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Growth of banking industry

Details 1951 19.7.69 1997 2011 Aug 26

No. of SCBs+Non-SCBs

(Exc.RRB) 92 85 101 171

RRB - - 196 86 Branches

(SCBs/Non-SCBs) 4,151 8,261 63,700 80,000

Deposits 919 5,540 5,07,533 55,09,100 Advances 727 3,813 2,82,702 40,44,862

Advance to priority Sec. 1 lakh 16 lakhs


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1951 1969 1995 2007

No of A/c credit 11,00,000 2,79,00,000

No. of A/cs deposit 18,00,000 30,00,00,000

% of CD deposits 51 25 17

% of HSS deposits 16 25 22

% of fixed deposit 33 50 61


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Type of banks 1969 1997 2011

Nationalised banks 14 19 19

SBI & Associates. 8 8 6 RRB 196 82


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Commercial Banks

Directed credit

Scope of priority sector expended by including financeto SIDC, SFC, refinance to RRB and for Foreign and

new private sector banks investment in SIDBI bonds Heavy increase in branches, unprecedented growth in

deposits and advances mainly priority sector

Impressive progress in achieving social objectives

Heavy fall in productivity and profitability

High cost/exp. due to branch expansion in RU/SU


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Commercial Banks

Interest rate structure Only intt. rate of HSS remained regulated

From 1997 Bank Rate (BR) linked to refinance

from RBI, penal intt. by RBI for shortfall inreserve

PLR system introduced

Base rate system introducede

Concessional ROI withdrawn from priority sectorexcluding Export & Agri. Concessional ROI toexport finance with interest subside from GOI


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Commercial Banks

Capital adequacy norms9% (capital to

risk weighted asset ratio)

Income recognition, Asset classification

and Provisioning norms

Introduced from 1992

Now NPA after 3 months Standard

sub standard

Doubtful

loss assets


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Commercial Banks

Transparency of financial statements

Formats changed- to disclose breakup ofprovisions and percentage of net NPA to net

advances etc.

Tax treatment to provisions

Only write off are tax deductible.

5% of income and 10% of average aggregateadvances of rural branches permitted as deductiblegeneral provision


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Commercial Banks

Board of Industrial Finance and Reconstruction (BIFR)

This has not been very successful experiment

Debt recovery tribunals-1993

8 recovery tribunals ONE appellate tribunal in Mumbai

Helped in the recovery of bad advances

Securitization Act

It has given extensive powers to banks to take possessionof assets and auction the same to recover the dues

Sale of NPA accounts in lots


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Commercial Banks

Regional rural banks

Sponsored by PSBs- 196 banksnow to RRBs 82

Branch licensing procedure - liberalized 1994

Foreign banks

Allowed to open branches on reciprocalarrangement

Permitted to invest upto 20%, within overall 40%investment, in private sector banks

They are exempt from target credit in agri. finance


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Commercial Banks

New private sector banks Since nineties new licenses started

A few banks e.g. Times bank, Global trust bank,

Punjab bank, Centurion bank of Punjab alreadyclosed / merged

Public issues of PSBs Most of the PSBs have come to capital market

minus Punjab & Sindh Bank

United Bank of India has been permitted to comewith IPO


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Commercial Banks

Supervisory authorityRBI Board of Financial supervision (RBI) has been

setup

Appointment of CMD/EDs and Boardmembers

Appointment Committee has been setup with RBIGovernor as chairman

Recruitment & creation of posts Public sector banks covered in autonomy criteria


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Commercial Banks

Narsimham CommitteeII - 1998

Appointed as a follow-up of 1992 recommendations and toexamine II generation reforms in terms of

action to be taken to strengthen the banking system streamlining procedures, upgrading technology and

HRD

structural changes in the system

Mutual Funds Bank subsidiaries sponsored

Many banks have started marketing the products


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Management of bank funds

Reserves prescribed by RBISLR

& CRR

Advances

Investments

Cash and Bank balances


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CAPITAL

Tier I capital is (a) paid up capital, statutoryreserves and other free reserves (b) capitalreserve minus equity in subsidiaries, intangible

assets and lossesTier II capital includes cumulative perpetual

preferential shares, revaluation reserve, generalprovisions, hybrid debt capital instruments

Tier III Capital i.e. permanent perpetualpreference shares


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CAPITAL

Maintain unimpaired min. capital equallent tothe prescribed rate in the aggregate of riskweighted assets and other exposer (CRAR)

Capital adequacy includes-capital funds, riskadjusted and off balance sheet items and capitaladequacy for subsidiaries

Risk adjusted assets=Risk weighted aggregatedfund based and non funded assets


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Exposer norms Follow prescribed exposer limits for credit in

relation to individual, group, industry, sector Exposer norms for investment in various

securities are determined by the RBI and theBoards of banksAdvance against shares/debentures

Against physical and demat shares Upto 10

lakhs and 20 lakhs respectivelyAgainst IPO at concessional rate upto 10

lakhs to individuals


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REGULATORY BODIES

GOVERNMENT OF INDIA

MINISTRY OF FINANCE

RESERVE BANK OF INDIA

(RBI)1948


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RESERVE BANK OF INDIA1948

MAJOR FUNCTIONS

Monitors, regulates, controls banking and financial system

Maintains monetary stability,

Promote development of markets and systems

Ensure credit allocation according to national priorities

Regulates volume of money and credit

Bankers bank

Manages SLR/CRR

Determines liquidity control measures

Acts as lender of last resort


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ROLE OF RBI

Note issuing authority Sole right to issue currency notes/coins other than

one rupee notes/coins and coins of smaller

denominations One rupee notes/coins and coins of smaller

denomination are issued by the Central Governmentcirculation is done by RBI

Currency issued by RBI is legal tender all over India.Presently the RBI issues coins of Paise 50, Rs. 1, 2, 5& 10 and notes of Rs. 10, 20, 50, 100, 500, 1000


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ROLE OF RBI

Note issuing authority-cont Production of currency, distribution, exchange,

withdrawal & destruction of notes, improvement in

security features & technology up-gradation ofcurrency notes

Through Regional issue offices and Currency chestsof RBI / Banks / Govt, treasury

Issues currency against 100% security/backing ofcoins/bullion, foreign securities, rupee coins, Govt.of India securities etc.


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ROLE OF RBI

Government banker Banker to the central / state Govt.

Undertakes all banking services on their behalf & transfer offunds & management of public debt

No interest on Govt. deposits is payable and no charges arerecoverable for normal banking business of the Govt.

Manages special funds e.g. calamity fund etc., issues andmanages relief bonds, Govt. employees pension disbursal and

functions as Govt. treasury Govt. pays commission for issue and management of public

debt i.e. raising resources from market


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ROLE OF RBI

Government banker-cont

Ways & Means Advances (WAMAs), to the Govt., for 3months maturity to bridge temporary gaps between receipts& payments at the graduated scale of intt. rate based onduration

Normal/clean advances without collateral

Secured advances against Govt. securities

Discretionary special advances Overdraft facility to state Govt. in addition to WAMA for 7

days @ BR and 8th day onwards @ BR+3%


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ROLE OF RBI

Supervising authority

Regulates / supervises banking operations throughRBI Act and Banking Regulation Act

Issues branch/extension counters/off-site ATMlicenses

Prescribe min. paid-up capital, reserves, transfer to

reserve fund, cash reserves and other liquid assetsfor banks


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ROLE OF RBI

Supervising authority-cont

Inspects the working of banks

Conducts ad-hock investigation

Controls appointments of CMD/CEO of privatesector banks

Approves / forces amalgamation / reconstruction /

liquidation of banks Supervises through Board of Financial Supervision


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ROLE OF RBI

Exchange control authority Develops/regulates foreign exchange Markets within

framework of Foreign Exchange Management Act (FEMA)

Custodian of countrys foreign exchanger reserves-Approx.

$320 bl. Decides investment & utilization of these reserves

Foreign exch. dealing through Authorised dealers (AD)

Supervises/controls ADs, exporters/importers for currency

trade Controls foreign exchange forward markets to provide cover

for exchange risk to importers/exporters


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ROLE OF RBI-

Regulator of money & credit

Formulates credit policy for adequate flow

of bank credit

Maintains currency price stability Influences the cost of money and credit

Important tools of credit policy are:

OMOs, BR, Refinance, CRR, SLR, LAF &Repo Rates


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ROLE OF RBI-


Open Market Operations (OMOs) - sale & purchase ofsecurities of Central Govt. and treasury bills (T.bills).

To control the amount of credit & money supply

To make bank rate policy more effective

To maintain stability in Govt. security & T. bill market

To support Govt. borrowing Programme

The OMOs are conducted only in Central Govt.

securities RBI uses only switching operation (no purchases against

cash) i.e. sale of long term against short term securities


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ROLE OF RBI-


Bank rate (BR)6% Rate used by RBI to buy/rediscount bills of

exchange/other eligible CP Banks relate their lending rate with BR

increase/decrease From 1997 advances by RBI, refinance, penalties for

shortfall in reserves are linked with BR Refinance

To relieve liquidity shortage To direct credit to selective sectors Export and General refinance in use


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ROLE OF RBI-


Cash Reserve Ratio (CRR) 4.5%

Intt. equal to BR for reserves above 3%

Ensure safety and liquidity of bank deposits

Penalty, ineligibility to refinance and also graduated fall in intt. rate

of CRR on shortfalls Statutory Liquidity Ratio (SLR) 23%

To restrict the expansion of bank credit

To increase bank investment in Govt. securities

To ensure solvency of banks

It is the ratio of cash in hand (excl. CRR), bl. in CD A/cs withbanks & RBI, gold and unencumbered Govt., local bodies & Govt.guaranteed securities to total demand & time liabilities

Default results in restrictions/high cost on refinance


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ROLE OF RBI-


Liquidity Adjustment Facility (LAF)- 2000

Operates through Repo and Reverse repotransactions to create the liquidity and to absorbliquidity on daily basis

The maturity period of Repos is 1 to 14 days andmin. bid size is 5 crore

Repo rate is normally 3-4 days rate, call rate is

overnight rate thereby call rate remains normallyhigher than repo rate Discretionary liquidity (DL) and call rate impact each other


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ROLE OF RBI-


Liquidity Adjustment Facility (LAF)- 2000-cont.. Autonomous liquidity (AL) is the flows from regular banking

functions e.g. currency authority and banker to the Govt. andbanks

It is total of (i) incremental accommodation in Waysand Means Advance (WAMAs), (ii) net primarysubscription to T. bills, dated securities (iii) rupeecoins net of Govt. deposits with RBI and (iv) RBI

primary market subscription Does not include flows out of policy intervention in

market


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Money Market Primary dealers (PD), money market mutual funds

(MMMF) came up, deregulation of intt. rates,enlargement of participants have emerged

Call / notice market

Commercial bills market Treasury bills market- (T bills) Commercial paper market (CP) Certificate of deposits market (CD) Repo market Foreign exchange market


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Priority sector lending means

Sectors of economy which are to be given priority

In 1968 meeting of National Credit Council, GOIdecided that commercial banks to increase finance inthe sectors of

Agriculture

Small scale industries

Description of priority sector got formalized in 1972

Net Bank Credit (NBC)This is reported every fortnight to RBI and is used

for calculating % for Priority Sector lending


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Priority Sector includes broadly

Agriculture Small scale industries including setting up of industrial

estates Small road and water transport operators owning upto 10

vehicles Consumption loans under consumption credit scheme for

weaker section Loans to software industry upto max. 1 crore from banking

industry Small business with original cost of equipment used for

business max. upto 20 lakhs Retail trade with max. finance to retail traders upto 10 lakhs


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State sponsored organizations for SC / ST Educational loans to individuals

Loans to specified industries in food and agro processingsector having investment in plant and machinery upto 5

crore Investment by banks in venture capital funds registered

with SEBI

Micro credit provided directly or through

intermediaries e.g. Loans to self help groups

Loans to NGO for lending to self help groups


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Professional and self employed persons with borrowingsunto 10 lakhs including

Max. 2 lakhs for working capital Purchase of one motor vehicle within these limits

For doctors setting up practice in rural area the limits are 15and 3 lakhs respectively

Housing loans (both direct and indirect)

Loans upto 15 lakhs in all areas

Loans upto 1 lakh for repairs in Rural/semi-urbanareas Loans upto 2 lakh for repairs in urban areas


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PRIORITY SECTOR FINANCE

Definition, targets and sub targets for prioritysectors are being determined by RBI every yearand can be modified from time to time

RBI decides procedures of handling the loanapplications, recording of applications, timeschedule for disposal, collaterals, penalties for

delayed payment and rehabilitation of sick SSIunits etc.


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Small Scale Industries

Industrial units engaged in manufacturing,processing or preserving of goods as alsoancillary units and whose investment in

plant and machinery is of maximum 1crore or as may be specified from time totime

For items like hosiery, drugs, stationeryitems etc. the limit is 5 crore


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Tiny Enterprises

Unit having investment in

plant and machinery upto 25

lakhs


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Micro credit

Provision of thrift, credit and other

financial services and products of

very small amount to poor in rural /semi urban / urban areas to raise

their income levels


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Self help groups means

Registered or unregistered group of micro

entrepreneurs

Group of 10-20 members formed with anintention to save small amount regularly to

help each other in times of need

Only one person from a family can bemember of SHG


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Target for Domestic and Foreign banks

Category Domestic banks Foreign banks

Total PS advances 40% of NBC 32% of NBC

Total Agri. Adv. 18% of NBC No target

SSI Adv. No target 10% of NBC

Export credit Not treated PS 12% of NBC

Adv. to weaker sec10% of NBC No target

DRI Adv. 1% of Previous No target years total advances


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Direct agriculture finance

Advance directly to farmers for agriculture Crop loan Upto 5 lakh against pledge/hypothecation of agri. Produce

for max. 12 months

Direct agri. Finance should be 13.5% of NBC Medium and long term loans for

Purchase of machinery Land development

Construction of farm bldg. etc. Loans to plantations, fishery, poultry, bio-gas plant For purchase of land by small farmers etc.


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Indirect agriculture finance includes

Credit for distribution of fertilizers, pesticides, seedsetc.

Loans upto 40 lakhs for distribution of cattle feed,

poultry feed etc. Deposits held by banks in NABARD Rural

infrastructure development fund (RIDF)

Subscription to specified bonds of Rural ElectrificationCorp. and NABARD etc.

Loans for other specified activities from time to time


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Indirect finance to SSI

As specified

from

time to time


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PRIORITY SECTOR FINANCE

Type of investment treated as priority sector finance Specified bonds of SIDBI, NABARD, NHB, HUDCO

and institutions Facilities like Lines of credit, Bill discounting etc. to

SIDBI, SFC and other specified organizations In case of shortfall of target by a bank

Domestic commercial banks are allocated, afterannouncement in budget every year, contribution toRural Infrastructure Development Fund (RIDF) of

NABARD at the rate and for the period as declaredevery year

Foreign banks can deposit an amount equal to deficit inSIDBI bonds of 1 year @ 8%


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Weaker sections within priority sector

Small and marginal farmers with max. 5acres of land, landless labourers, tenantfarmers

Artisans, village and cottage industry with amax. Credit limit of 50000

SC and ST

Beneficiaries under DRI scheme

Self help groups etc


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Non-fund based Non fund based facilities are 100% substitute of fund based

facilities Contingent liability can become current liability if invoked These all are 100% risk weighted assets

Therefore, proper appraisal is necessary D.P. (Document against payment) L/C (Letter of credit) D.A. (Document against acceptance) L/C (Letter of credit) Guarantees

Performance Financial Advance payment Deferred payment (DPG)

M i bj ti f N f d


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Main objectives of Non-fund

facilities

To overcome shortage of funds

To increase profitability

To increase liquidityTo have easy monitoring

To facilitate international trade

To achieve optimum utilization of funds


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Precautions for financial guarantee

Lien on the goods received Proper treatment be given for assessing working

capital facilities

Ensure advance cash/goods received are usedfor production Ensure there are no onerous clauses Penalty for cost over run of project V/s

profitability of project Capability of firm to complete the work as per

terms


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Normal purpose to issue guarantees

Performance guarantee Supply contract

Bid bond Security deposit/Earnest money bond

PerformanceAdvance payment

Turnkey projects

Bid bond PerformanceAdvance payment Retention money guarantee Guarantee for raising funds in foreign countries


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Normal purpose to issue guarantees

Financial guarantee In lieu of excise duty payment For disputed custom duty For payment of sales tax

For payment of Income tax For payment of goods purchased on credit

Other guarantees

In favour of supplier of goods for undertaking job work In lieu of payment of excise duty on goods exported In lieu of custom duty on imported goods which are to be

ultimately exported Export performance


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RBI guidelines for guarantees

In case of following guaranteesnormally 100% cash margin to be taken

Guarantee issued to the court

Sales tax/Income tax guarantee

Guarantees for clearance of foreign cars

Guarantees to steamer companies /Railways for delivery of goods in absenceof bills of landing / railway receipt


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COMMERCIAL BANK

MANAGEMENT-CREDIT

APPRAISAL & MONITORING

A PRESENTATION

BYCA. R.C.AGARWAL


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Purpose of Credit Appraisal

It is major area of decision making for credit proposals

To know about the party

To ensure fair assessment of borrowers needs for credit

Appraisal is done pre-sanction and post sanction level It is scientific financial analysis of partys overall

operations

To identify exact purpose for which credit facilities arerequired

To decide the eligibility of credit


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Purpose of Monitoring

To ensure proper end-use of funds

To nullify the chances of diversion of funds

To have periodic review of progress and prospects of the

partys position To maintain control over the partys operations

To ensure implementation of banks terms and conditions

To pick-up signals on the health and status of partys

position

To take remedial measures

To take care of recovery, revival or rehabilitation

Important aspects of bank


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lending Lending is an individual decision for lender/borrower

Main principles of lending

Priority / non-priority area

Safety / Security

Liquidity

Purpose

Profitability

National objective Spread / diversification of risk

Post sanction supervision and control



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lending Types of borrowers

Corporate / Non-corporate

Partnership / Proprietorship

Individual

Manufacturing

Traders

Small scale industry (SSI)

Small medium enterprise (SME) Priority Sector

Seasonal Industry like Tea, Cotton Sugar etc.


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Preliminary important matters

3 P

Party

Project

Profitability

3 C

Character of party

Capacity of party

Capital invested by party


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To satisfy about

Policy

Business policy of party about business

Bank/Government/RBI Priority/Non priority

Marketability of product

Availability of raw material and infrastructure

Achievability of projectionsTurnover projections

Profit projections


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Nature of Account

Prestigious group

Export oriented

Deposit oriented

Backward area

Ancillary business

Agro products or other priority sector area Small scale industry

Important points for appraisal


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from Party Standing of party

Business experience

Directors / Partners worth and market standing

Capacity of management team

Position of industrial relations

Labour turnover

New account/ renewal / modification

Category of advance i.e. priority non-priority etc. Type of business

Details of branches of firm



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from Party Age of plant and machinery

Future plan for 3 to 5 years

Plans for modernization / expansion and source of finance

Why change of bank is desired in existing project/business Industrial group covered under MRTP Act 1969

Location of factory and branch from where facility to beavailed

Major shareholders Comments on credit report

Banking with the bank since when



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from Party Capital structure and means of capital

Borrowing powers

Search report about charge creation, titles of assets etc.

Details of facilities required

Facilities enjoyed with other Banks/Institutions

Financial ratios

Statutory liabilities / Contingent liabilities

Litigations Facilities enjoyed by Guarantors/Associate firms

Justification for working capital requirement



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from Party Restrictive covenants

About dividend

About management

About assets

About expansion of business

About unsecured loans and advances

Assessment of fund based and non-fund based facilities requirements

Experience with banks-covering nature and conduct of bank accounts

Tax assessment

Promoters contribution



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from Party Comparison of

Last projections with actuals

Reasons for variations

Growth of the company with similar company inmarket

Relationship with turnover to

SummationsAverage balance

Utilisation of funds / limits

Important aspects in credit


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Important aspects in credit

application Terms of agreement for sale and payment to be received

Of assets purchased

Of goods sold/purchased

Credit period permitted or received

Diversion of funds

To sister concerns

Investments in Capital / Commodity markets

Investments in real estate In other activities / projects of different line/same line

For long term purposes or vice versa

T


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Term Loans

Important information to be provided Techno-economic report

Details of land and buildings and plant and machinery

Technical competence and Manufacturing process Delivery schedule of plant and machinery and consumables

Means of finance

Security offered

Margin

Working capital arrangements

Time schedule for implementation of Project


T L


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Term Loans

Important information to be provided cont...

Cash flow / Debt coverage ratio / Amount of limit/ Repayment schedule

Pre-sanction inspectionApplications pending with other Financial

institutions/banks

Refinance Finance availed from other banks


C


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Care Current assets

Cash and deposits under lien for bank guarantees and L/Cs

Receivables

Inventories

Current liabilities

Deposits of out side parties

Unsecured deposits

Term loan installments payable within 1 year

IT provisions

D.A. L/C facility

Stocks of DA L/C



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I


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Important matters

Last 2 reviews to see projections were nearer to actuals

Capacity utilizationwill party be able to produce asprojected in available capacity

Quarterly information systemTo fix limits

Whether company is working within projected levels

Levels of inventory, receivables and consumablestores and sparesnorms for industry and pasttrends



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APPRAISAL


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APPRAISAL

Statement of accounts cont.

Whether Projected turnover is achievable?

Keep in mind Modernization / Expansion / Increase in orders

Export receivables

Reduce from CA before arriving at working capital eligibility

These receivable to financed fully without margin

Deposits from market Maturing / due in a year, to be taken as

current liability-not necessary to pay but due and even renewed To see that current liabilities are not projected less

To see that current assets are not projected more


D i l


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Danger signals

Account is running grossly out of order or always running nearthe drawing power

Payments are being made for purpose other than normalbusiness

Abnormal cash transactions

Heavy return of bills (more than 10%)

Payment of all bills on due date by drawees

Heavy sales without any reflection in partys account with bank

Party spending abnormally heavy amounts on luxury expenses,especially for personal use


D i l


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Danger signals

Very few transactions in partys account

Reduction in normal visits of party to bank branch

Party behaves abnormally like abnormal courtesy, abnormal non-cooperation

Abnormal thing noticed during inspection of account

Transfer of amounts outside the business of firm

Transactions through shroffs or money lenders

When there is undue delay or avoidance in submission ofBalance sheet and other papers for review of account

Default in payment of statutory dues



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T d itt 1975


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Tandon committee-1975

I method of lending

Total current assets (CA)

(-) Current liabilities excluding bank borrowings (CL)

= working capital gap (WCG)Less 25% of WCG or Net working capital (NW i.e.CA-CL) which ever is higher

= MPBF Minimum current ratio 1.17:1

T d itt 1975


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Tandon committee-1975

II method of lending Total current assets (CA)

(-) Current liabilities excluding bank borrowings (CL)

= Working capital gap (WCG)Less 25% of total current assets or

Net working capital (NW i.e. CA-CL) whichever ishigher

= MPBF Minimum current ratio 1.33 : 1

Ch r itt 1978


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Chore committee-1978

To use II method of Tandoncommittee for limits of 10 lakh andabove

Firm to submit monthly selectoperational data

Banks to fix operational limits on thebasis of QIS

Nayak and in house committee - 1993


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y

Turnover method

Working capital requirement is to be computedminimum 25% of projected turnover

80% of requirement to be given by banks and 20% byborrowers

Turnover method Assessment Projected annual turnover (PAT) i.e. gross sales

inclusive of excise duty should be realistic Reasonableness of PAT be satisfied from annual

statement of accountsAssess as per turnover method and as per traditional

system

In ho se committee October 1993


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In house committee-October 1993

Turnover method Assessment-cont

If traditional method calculation is more than thelimits to be permitted by turnover method than limit

to be permitted whichever is higher but DP to be onthe basis of value of stocks less margin and unpaidstocks

Level of trade credit should be in tune with past

practice. If it is more than projected trade creditallow at past level if justification is convincing

Freedom to determine MPBF


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As per RBI credit policy of April 1997, RBI withdrewthe prescriptions to calculate working capital limits asper Tandon committee

Banks to have their own system to assess working

capital credit needs within prudential guidelines andexposer norms prescribes by RBI Units engaged in export need not provide margin for

financing current assets represented by exportreceivables

Credit limits of units in Sugar industry to be determinedon basis of Current ratio of 1:1



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Sick/Weak units to be exempt from applicationof II method of lending

Additional credit needs of exporters coming out of firmorders of confirmed L/C, which were not taken in

account for fixing regular limits, to be provided in fulleven if sanction of such additional limits exceedsMPBF

Borrowing units marketing/trading 100% productmanufactured by village, tiny and SSI units will besubjected to I method of MPBF provided such firmsettles dues of suppliers within 30 days from date ofsupply

Actions need prior approval of


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p pp

lending institution

Additional acquisition of fixed assets Expansion and modernization plans

Borrowings from outside sources

Investment in subsidiaries Dividend out of years earnings

Issuing guarantees on behalf of sister concern

Pre-payment of loans before due date to financial

institutions Disposal of assets

Willful defaulters


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Willful defaulters

The unit has defaulted in meeting itspayment/repayment obligations to lender even when ithas capacity to honour the said obligation OR

Unit has defaulted in meeting its payment/repayment

obligations to lender and has not utilized finance fromlender for purpose for which finance was granted buthas diverted the funds for other purposes OR

Unit has defaulted in meeting its payment/repaymentobligations to lender and has siphoned off the funds so

that the funds have not been utilized for the specificpurpose for which the finance was granted, nor thefunds are available with the unit in form of other assets


100/101

Diversion of funds


101/101

Diversion of funds

Shortfall in deployment of funds visa-a-visa theamounts disbursed/drawn and the difference not beingaccounted for

Siphoning of funds is construed to have occurred if anyfunds financed are utilized for purpose unrelated tooperations of the borrower, to the detriment of thefinancial health of the entity or of the lender. The

decision of lender in this respect should be base oncircumstances of the case.

Documents

Commercial Bank Funds Regulatory Process & Priority Sector Lending & Non Fund Facilities (2)