INDEX             

Para No. Particulars Page No.1 Objective 32 Strengthening the Structure & Processes of Credit Risk

Management3

2.1 Definition of “Credit Risk” 32.2 Credit Risk Management –Framework 3  2.2.1 Credit Risk Management Structure 3  2.2.2 Credit Risk Policy and Strategy 6    A Identification of Target Market for the Bank 10    B Decision on Risk Acceptance Levels 21      I Linking Loaning Powers with Risk Rating 21      II Other Loaning Powers 22      III Linking of Pricing with Credit Risk Rating 25      IV Exposure in Weak Accounts 28    C Adherence to Prudential Exposure Norms 29  2.2.3 Process and Systems 36    A Credit Risk Identification and Measurement 36      1 Industry Rating 36      2 Credit Risk Rating Models 37      3 Categories of Advances exempted from

Risk Rating40

      4 Credit Delivery 41      X Strengthening of Pre-Sanction Appraisal 41      Y Post Sanction Follow up 47    B Grading of Borrowers under the Rating System 52    C Reporting and Analysis of Credit Risk 53    D Portfolio Management 55    E Collateral Management Policy 55    F Use of Guarantees as Risk Mitigants 55

3 Other issues 56i) Group Approach 56ii) Consortium Arrangement 56iii) Multiple Banking Arrangement 56iv) Syndication 56 v) Validity of Credit Limit Sanctioned 57vi) Selective Credit Control 57vii) Use of CIBIL Data and RBI Defaulters List 57viii) New Business Group (NBG) 57ix) Wilful Defaulters and Action Against Them 58x) Exploring New Avenues 58

4 Environmental Issues 585 Sanction of proposals beyond the purview of Credit Management

and Risk Policy59

Appendix Industry-wise Credit Exposure Limits (as percentage to Total Advances (FB+NFB) of the Bank as on last Audited Quarter)

61

 

ANNEXURE 

CREDIT MANAGEMENT & RISK POLICY 2010-11 1. OBJECTIVE The Credit Management & Risk Policy of the bank at the macro level is an embodiment of the Bank’s approach to understand, measure and manage the credit risk and aims at ensuring sustained growth of healthy loan portfolio while dispensing the credit and managing the risk. This would entail reducing exposures in high risk areas, emphasizing more on the promising industries / productive sectors/ segments of the economy, optimizing the return by striking balance between the risk and the return on assets and striving towards maintaining/improving market share. 2. STRENGTHENING THE STRUCTURE & PROCESSES OF CREDIT RISK

MANAGEMENT 

2.1 Definition of “Credit Risk” “Credit risk” is the possibility of loss associated with changes in the credit quality of the borrowers or counter parties. The counter parties may include an individual, small & medium enterprises, corporate, bank, financial institution, or a sovereign. In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a borrower or counter party to honour commitments in relation to lending, settlement and other financial transactions.  2.2. Credit Risk Management -Framework The overall framework of credit risk management in the bank would comprise of following building blocks: 

2.2.1 Credit Risk Management Structure 2.2.2 Credit Risk Policy & Strategy2.2.3 Processes and Systems

 2.2.1 CREDIT RISK MANAGEMENT STRUCTURE Under overall credit risk management framework, the bank has put in place the following structure: 

a. i) Risk Management Division (RMD): The Division is headed by GM with distinct functions related to credit risk, namely:  framing of policies, interalia, related to credit risk, development

of systems & models for identifying, measuring and managing credit risks and their implementation;

monitoring and managing the industry risk; integrated risk management functions.

ii) Circle Risk Management Departments (CRMDs):

Risk Management Departments functioning at Circles are called as Circle Risk Management Departments (CRMDs). CRMDs will function under the administrative supervision of second senior most official of the Circle. The operational work will be looked after by DGM/AGM/CM of the Circle Office who is not directly involved in the process of the sanction of credit proposal. Their responsibilities include monitoring and initiating steps to improve the quality of the credit portfolio of the Circle, tracking down the health of the borrowal accounts through regular risk rating, besides assisting the respective Credit Committee in addressing the issues on risk. Their role in Credit Risk Management includes the following:

To ensure that risk awareness percolates down to the branch level in the Circle.

To assess the credit risk rating in all eligible accounts falling under Circle Office powers and ensuring risk rating of all other eligible accounts falling under HO power.

To make scrutiny of all loan proposals falling under the powers of Circle and HO from the credit risk angle.

To ensure that the users at the Circle Office/Branch level are adequately trained on the methodology of rating as well as various credit risk management processes including use of the on-line Application.

To ensure that a proper inventory of the trained Raters is maintained and regularly updated to ensure that they are utilized properly.

To take steps for upgradation of the skills of risk raters through periodical seminars/training.

To undertake Portfolio, Migration & Default Rate analysis for their respective Circle by using the reports available in PNB Trac to improve the data quality in the System.

To undertake variance analysis of the ratings being vetted by their office and ensuring that corrective measures are initiated to improve the position.

To assist RMD, HO in formulating and developing bank’s credit policy based on behaviour of Circle’s credit portfolio by giving feedback on the analysis made by them on various industries to which exposures have been made at Circle level.

To furnish feedback on refinement to be made on the credit risk rating tools on an on-going basis.

  To conduct studies and suggest to RMD with supporting documents,

the area which shows increasing trend in risk perception viz. a particular scheme/segment/industry /credit practice in geographical area showing signals of increased risk.

 b. Risk Management Committee (RMC) is a Sub-Committee of Board

with overall responsibility of formulating policies/procedures and managing all the risks. It adopts integrated approach in managing all the risks.

 c. Credit Risk Management Committee (CRMC) is a top level

functional Committee headed by CMD and comprises of EDs, CGMs/GMs of Risk Management, Credit, Treasury, etc. as per the directives from RBI. Its specific responsibilities are as under:

  Implementation of credit risk policy/ strategy approved by the

board/ RMC. Monitor credit risk on a bank wide basis and ensure compliance of

limits approved by the Board/ RMC. Recommend to the Board for its approval, policies on standards for

presentation of credit proposal, financial covenants, rating standards and benchmarks.

Devise delegation of credit approving powers, prudential limits on large credit exposures, asset concentration, standards for loan collaterals, portfolio management, loan review mechanism, risk concentration, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/ legal compliance, etc.

 d. Formation of Credit Committees: 

The bank has in place “Grid/Committee” system in credit sanction process.

Consequent upon implementation of 3-tier structure where Circle Office headed by AGM/DGM/GM has been acting as a sole tier between the branch and HO, the scope of Credit Committee has been widened to cover the proposals falling under the vested loaning powers of AGMs working as Circle Heads. Accordingly, every loan proposal falling within the vested powers of Circle Head and above is discussed in a Credit Committee, which, on the merit of the case, recommends the proposal to the sanctioning authority. Such committees have been formed both at HO and Circle Office levels. The credit committee at HO includes CGM/GMs-Credit, CGM/GM-RMD, GM (Treasury) and GM (Corporate Marketing).. For credit proposals falling within the vested power of CGM/GM, the credit committee at HO includes DGM/AGM/Chief Manager-CAD and DGM/AGM/Chief Manager–RMD. The current constitution of the committee at Circle Office is as under:

One senior officer from credit department One senior officer from CRMD One independent senior officer not concerned with credit

 The members should preferably be in the rank of scale IV or above but not below the level of scale III in Circles where sufficient officers in Scale IV and above are not available. The committee deliberates upon the credit proposals including risk rating of the borrower, risk specific to the borrower, risk in the industry and suggests mitigation thereof. Detailed guidelines in the matter are given in L&A circular No. 51 dated 31.03.2008.

 e. Credit Audit Review Division (CARD) Bank has also set up a Loan

Review/Audit Mechanism to be looked after independently by CARD.  

2.2.2 CREDIT RISK POLICY & STRATEGY In order to provide a robust risk management structure, the policy aims to provide a basic framework for implementation of sound credit risk management system in the bank. It deals with various areas of credit risk, goals to be achieved, current practices and future strategies. Though the bank has implemented the Standardized Approach of credit risk, as prescribed by Reserve Bank of India in its final guidelines on capital adequacy framework, yet the bank shall continue its journey towards adopting Internal Rating Based Approaches. As such, the credit policy deals with short-term implementation as well as long term approach to credit risk management. The policy of the bank embodies in itself the areas of risk identification, risk measurement, risk grading techniques, reporting and risk control systems /mitigation techniques, documentation practice and the system for management of problem loans. The bank has implemented the following system for adopting Standardized Approach:  

i) Capital Charge for Credit Risk In terms of the RBI guidelines bank has implemented Standardized Approach w.e.f. 31.3.08. Under Standardized Approach loan assets have been classified into following major categories: Claims on Domestic/Foreign sovereigns  Claims on Central Government/ State Govt. and accounts guaranteed by Central Government will attract risk weight of 0% whereas State Govt. guaranteed claims will attract 20% risk weight.  There will be 0% risk weight in case of claims on RBI/DIGCC/CGTMSE. However, the claims on ECGC will attract risk weight of 20%. Foreign sovereign will attract risk weight as per the rating assigned by international rating agencies namely Standard & Poor, Moody’s and FITCH. Claims on Public Sector Entities (PSEs)/ Primary Dealers Claims on domestic public sector entities/Primary Dealers will attract risk weight in a manner similar to claims on corporates whereas claims on foreign PSEs will attract risk weight as per risk ratings assigned by the international rating agencies. Claims on Banks All claims on scheduled banks having CRAR of at-least 9% will attract 20% risk weight. Other banks having CRAR of at-least 9% will attract 100% risk weight. However, banks having CRAR less than 9% would attract risk weight upto 625% depending upon the CRAR.Claim on foreign banks will be risk weighted as per the ratings assigned by international rating agencies.   

Claims on Corporates Claims on corporate include all FB and NFB exposures other than those which qualify for inclusion under sovereign, bank, regulatory retail, residential mortgage, NPA and specified categories. The risk weight shall be in the range of 20% to 150% depending upon the ratings assigned by the external credit rating agencies as approved by the RBI/Board of the bank. These rating agencies are CRISIL, ICRA, CARE and FITCH India. The risk weights would be as under:

External rating

AAA AA A BBB BB & below

Unrated exposure

Corresponding internal rating

AAA AA A BB B & below

Risk weight 20% 30% 50% 100% 150% 100% 

Claim on non-resident corporates will be risk weighted as per the ratings assigned by international rating agencies. All unrated standard restructured/rescheduled claims should be assigned a higher risk weights until satisfactory performance under the revised payment schedule has been established for one year when the first payment of interest/principal falls due under the revised schedule. The applicable risk weight shall be 125%. Claims included in the Regulatory Retail Portfolio Claims (including both FB and NFB) in respect of individual, HUF, partnership firm, trust, private limited company, public limited company, co-operative societies etc. that meet all the four criteria as mentioned in Annexure to L&A circular No. 100/2007 be included in regulatory retail portfolio. Claims included in this portfolio shall be assigned risk weight of 75% except in non-performing assets. The criteria of Regulatory Retail Portfolio, however, does not include claims (both FB and NFB) such as loans to real estate sector, loans & advances to bank’s own staff which are fully covered by superannuation benefits and /or mortgage of house, consumer credit including personal loans and credit card receivables, capital market exposures, ND-NBFCs (SI) and venture capital funds. Claims secured by Residential Properties The lending to individuals for securing residential properties which are fully secured by mortgage of residential properties shall attract risk weight as indicated below: Category of loan/advance Risk

weight

Housing loans to individuals:  

i) Outstanding upto Rs.30 Lacs and LTV upto 75%ii) Outstanding above Rs.30 Lacs and LTV upto 75%iii) Where LTV ratio is more than 75%, irrespective of outstanding

50% 75%100%

 Rescheduled claims secured by residential property shall however be risk weighted with an additional risk weight of 25% under each category making it as 75%, 100% and 125% respectively. Claims under Specified Categories Claims secured by the commercial real estate and venture capital fund will attract risk weight of 100% and 150% respectively.  Consumer credit including personal loans and credit card receivables but excluding educational loan will attract risk weight @ 125%. However, as gold and gold jewellery are eligible financial collaterals, the counter party exposure in respect of personal loans against gold and gold jewellery be worked out under the comprehensive approach after netting the value of security from outstanding and then applying risk weight of 125%. The risk weight in case of Capital Market Exposure will attract a higher risk weight of 125% or a risk weight warranted by the external rating or lack of it.  Claims on NBFC-ND-SI: The claims on the rated as well as unrated NBFC-NDSI (other than AFCs), regardless of the amount of claim, shall be uniformly risk weighted at 100 per cent. As regards the claims on AFCs, risk weights would be governed by the external credit rating of the AFC, except that claims that attract a risk weight of 150 per cent under the New Capital adequacy Framework shall be reduced to a level of 100 per cent. Other assets Claims on bank’s own staff which are fully covered by superannuation benefits and/or mortgage of flat/house will attract 20% risk weight. Other loans and advances to Bank’s own staff shall be classified as Regulatory Retail. NPAThe unsecured portion of NPA net of specific provision and partial write offs shall be risk weighted as under: 

    Residential mortgage

Other NPAs

1 Specific provisions are less than 20% of outstanding amount of NPA

100% 150%

2 Specific provisions are at least 20% and upto 50% of outstanding amount of NPA

75% 100%

3 Specific provisions are at least 50% of outstanding amount of NPA

50% 50%

 Off Balance Sheet Items

 

Non market related off balance sheet items such as direct credit substitutes and trade & performance related contingent items are also subject to risk weights. First credit equivalent amount in relation to these items is determined by multiplying the contracted amount of that transaction by the relevant credit conversion factor (CCF) and then the stipulated RW is applied to arrive at the RWA.

 Under the RBI guidelines, RW is also applicable where the fund based facility is undrawn or partially undrawn and the same is not unconditionally cancellable. The amount of undrawn facility shall be included in the non market related off balance sheet item after application of relevant CCF. In terms of RBI guidelines, the bank has implemented standardized approach as prescribed as on 31.03.08. To evaluate the risk weighted assets for credit risk under Standardized Approach, bank has got upgraded the existing LADDER system called “Cris-Mac”, which shall generate the requisite reports.  ii) Credit Risk Mitigation Techniques RBI has prescribed list of eligible financial collaterals, method of valuation of these collaterals and haircut thereon etc., which would help the bank in reducing the exposure amount by permitting offset of such collaterals against the exposure.  Banks use a number of techniques to mitigate the credit risk e.g. exposure may be collaterised in whole or in part by cash or securities, deposits from the same party, guarantee of a third party etc. RBI guidelines under Standardized Approach of credit risk allow a wide range of credit risk mitigants to be recognized for regulatory capital purposes provided these techniques meet the requirements of legal certainty. It may be added that while the use of CRM technique reduces or transfers credit risk, it simultaneously may increase other risks such as residual risks. The bank will ensure that all these risks are also monitored and controlled.  The software system has been fine tuned for computation of RWA under credit risk as mentioned above to take care of CRM techniques prescribed by RBI in their guidelines. Under Standardized Approach, the following securities (either primary or collateral) are eligible for treatment as credit risk mitigants: (i) Cash (as well as certificates of deposit or comparable instruments

issued by the lending bank) or deposit with the bank which is incurring the counter-party exposure.

(ii) Gold: Gold would include both bullion and jewellery. However, the value of the collateralized jewellery should be benchmarked to 99.99 purity.

(iii) Securities issued by Central and State Governments

(iv) Indira Vikas Patra, Kisan Vikas Patra and National Savings Certificates provided no lock in period is operational and if they can be encashed with in the holding period.

(v) Life insurance policies with a declared surrender value of an insurance company which is regulated by an insurance sector regulator

(vi) Debt securities rated by a recognised Credit Rating Agency where these are either:(a) at least BBB- when issued by public sector entities; or (b) at least PR3/ P3/F3/A3 for short-term debt instruments.

(vii) Debt securities not rated by a recognised Credit Rating Agency where these are:a) issued by a bank; andb) listed on a recognised exchange; andc) classified as senior debt; andd) all rated issues of the same seniority by the issuing bank that

are rated at least BBB- or PR3/ P3/F3/A3 by a chosen Credit Rating Agency ; and

e) the bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB- or PR3/ P3/F3/A3 (as applicable) and;

f) Banks should be sufficiently confident about the market liquidity of the security.

(viii) Units of Mutual funds regulated by the securities regulator of the jurisdiction of the bank’s operation mutual funds where:

a price for the units is publicly quoted daily i.e., where the daily NAV is available in public domain; and

Mutual fund is limited to investing in the instruments listed in this paragraph.

 (Equities including convertible bonds are no longer part of CRM) 

iii)CREDIT RISK STRATEGIES The bank has been implementing various techniques, relevant structure and processes for credit risk measurement but it may take some more time to quantify the entire credit risk in banking book. Based on the results of the risk measurement models developed by the bank, the bank has prescribed various risk strategies for credit portfolio, which involve the following:  

A. Identification of Target Market for the bankB. Decision on Risk Acceptance levelsC. Quantitative Exposure Ceilings

 A. IDENTIFICATION OF TARGET MARKET FOR THE BANK An important aspect of targeted marketing is to have matching delivery channels. Bank has created proper credit delivery channels for building up of a sound credit portfolio. Bank has created specialized structure wherein relationship management concept has also been introduced. The purpose of creating specialized structure is to ensure prompt credit dispensation and improving credit risk management practices. The initiatives taken in this regard are: 

- Large Corporate Branches- Mid Corporate Branches- International Banking Branches- Specialized SME Branches- Trade Finance Branches- Signature Branches

- Retail Loan Hubs - Specialized Agriculture Finance Branches 

These initiatives help the bank in improving the effectiveness of the delivery channels for targeted marketing. However, in order to expedite decision making besides qualitative improvement in credit appraisal system, Single Point Credit Appraisal System has been introduced to achieve the following objectives: 

To ensure that marketing/delivery and the credit appraisal systems to be distinct and separate.

  To ensure that the branches to:

i) Concentrate on marketing of credit.ii) Focus on improvement in customer service.iii) Act as delivery point for credit dispensation and monitoring of

credit. 

For successful implementation of the system, Circle Heads to ensure that the revised system be implemented with proper planning and adequate staff be trained to handle appraisal of credit proposals and risk rating to ensure quality. For this, CCPCs at Circle Offices be strengthened/revitalized.

 I. THRUST AREAS In the year 2010-11, the thrust areas for the bank shall be as under: i) Retail Segment Retail segment for business ownership credit dispensation purposes is considered a segment of borrowers governed by the schemes developed by Retail Banking Division. The performance, monitoring and control of all borrowers under such schemes are looked after by Retail Banking Division. The retail segment should not be construed as defined by RBI as regulatory retail in the New Capital Adequacy Framework (NCAF). For the purpose of NCAF applications, not only the individual borrowers covered by schemes of RBD but also other small and medium borrowers who comply with qualifications under NCAF would be applied a risk weight applicable to regulatory retail. Hence, retail segment for business thrust and for NCAF must be understood properly while applying provisions of the policy. Bank will continue to use retail as a growth trigger and direct its policies towards boosting advances to retail segment, mainly through Retail Segment Branches. The objective will be to grow at a reasonable pace and consolidate the retail loan portfolio. For this, the Bank will continue to study the market requirements; evolve innovative products for meeting the requirements of Retail customers and establish itself in a big way in the Retail Banking Arena. Following areas will be focussed to build robust and quality-based retail loan portfolio:-  

a) Tapping captive customers’ business and ensuring that at least 5% of these avail any of our retail loan products.

b) Pricing the retail products with competitive edge;c) Making value additions in the retail products to keep them customer

friendly.d) Strengthening the system of receiving loan applications on line,

with regard to its various retail loan products;e) Establishment of robust scoring model by continuous review;f) Curtailing the turnaround time in sanction/disbursement of loan

through effective leveraging of CBS and Retail Lending Software;g) Strengthening the retail marketing teams for popularizing the

products in the nook and corner of the country and optimizing retail dispensation;

h) Imparting requisite credit skills/knowledge.i) Ensuring timely recycling of funds, by further strengthening

recovery mechanism. j) Bringing objectivity and efficiency in decision making through

centralised processing units/retail hubs.  

There will be a continuous focus on maintaining and improving the quality of assets, so that the level of impairment (NPA) in retail loans is kept at minimal level. Emphasis will particularly be on taking more stringent measures with a view to avoid delinquency in the retail segment due to acts of impropriety on the part of the borrower through forged documents or the same borrower raising multiple loans from different banks against the same asset. Some of the steps, requiring more focussed attention, to address the credit and fraud risks shall include the following :- 

Identity Proof of the customer and Market information; Physical verification of the credentials from the employer and

residence of the customer; Stability of employment and period of stay at the place of

residence; Strict checks on the verification of income & other

documents submitted by the customer; Physical verification of collateral offered; Proper selection of Advocates/Valuers/ Chartered Accountants

for various tasks relating to retail loans. Advances under following retail loan schemes will be encouraged to increase the priority sector portfolio/boost the country’s economic development and meet the needs of various segments of Society, including those hitherto deprived, students and senior citizens :-  

Housing Loans with its variants; Education Loans Auto Loans Loans to Pensioners Reverse Mortgage Loan Scheme

 The Policy of the Bank will also aim at higher recovery rates, strictly implementing the “System of monitoring Retail Loan Accounts”. By

encouraging steps to improve Branch-wise recovery to minimum 90% and NPAs of less than 2%.  Although regulatory guidelines stipulate that maximum aggregated retail exposure to one counterpart should not exceed the threshold limit of Rs.5 crore, yet individual housing loans will form part of retail banking segment for the purpose of reporting irrespective of any upper ceiling.

   

ii) Priority sector Credit: Bank will continue to direct its policies for boosting advances to all segments of Priority Sector to remain ahead of the national goals under priority sector, agriculture, weaker sections, women beneficiaries, etc.  From 1st April 2010, a number of accounts having sizeable outstanding will be ineligible for classification under Priority Sector including RIDF, Advances to State Electricity Boards, Advances to National Cooperative Development Corporation and fresh advances to Housing Finance Companies as permitted vide special dispensation of RBI (as per PSLB LBC Circular No.90/ 2008).  The ineligibility of these accounts will reduce the Priority Sector advances to a sizeable extent from 1.4.2010, and more thrust on priority sector lending is required in the year 2010-11 to offset this decline.  In addition to agriculture, thrust shall remain on boosting Micro Credit by formation of Self Help Groups and also to have higher growth under Small Enterprises, Education and Housing segments of Priority Sector. Under Agricultural credit, importance shall be given to field level implementation of initiatives taken in financing farmers through tie-up arrangements with sugar mills, rice mills, dal mills, seed processing units, food and agro processing units, tractor dealers and collateral managers for financing the farmers for production credit and commodity financing.   Thrust will be given for increasing investment credit portfolio of our Bank under agriculture. The revisions undertaken in the KCC Scheme shall be leveraged to remain competitive in the market.  Focused attention shall be paid to increasing disbursements under following schemes:  a) Kisan Credit Cardb) Kisan Ichchhapurti Yojnac) PNB Krishak Saathi Schemed) Scheme for financing tenant farmers and oral lessee farmers.e) Dairy/Poultry Venture Capital scheme f) Advance against warehouse and cold storage receiptsg) Advance for purchase of Tractors and other   agricultural

implements including agriculture transportation.h) Minor Irrigation with emphasis on drip and sprinkler irrigation

i) Allied agricultural activities like dairy, poultry, fishery, piggery, sheep/ goat etc.

j) Loan for construction of Rural Godowns/Cold Storages.k) Credit linked back ended subsidy scheme for development/ 

strengthening of agricultural marketing infrastructurel) Agri-clinics/Agri-business centresm) Agriculture infrastructure like cold chains, refrigerated vans etc. for 

transport and preserving perishable goods.n) General Credit Card.Financing Micro Finance Institutions for on-lending purpose, for activities eligible for classification under agriculture/ Priority Sector will be an area of thrust.   Bank will continue to purchase eligible portfolio from NBFCs/MFIs, for increasing agriculture portfolio. Thrust on increasing of agriculture portfolio through collaboration with Collateral Management agencies and also through BC/BFs. In addition to the above, thrust shall be on lending for investment purposes under agriculture, namely, irrigation, post-harvest infrastructure, supply chain build up, transportation network and processing.  Financing to/through supply chains and retail chains shall be explored.  Financing to tractor dealers shall be intensified.   Loans for pre and post harvest activities including food and agro-processing undertaken by individuals, SHGs and cooperatives in Rural areas will be encouraged for increasing lending under Direct Agriculture, besides loans to food and agro processing units (investment in P&M up to Rs 10 crore) under taken by other than above for augmenting Indirect Agriculture.   Apart from traditional activities, loans shall be encouraged for financing diversified agriculture activities, such as, fisheries, horticulture, floriculture, aromatic and medicinal plants etc.   Proposals of prospective agri-preneurs who have been issued Letters of Intent by National Horticulture Board should be given priority.   In order to have access to specialized appraisal skills and to procure high value Agri-business projects, close liaison shall be maintained with NABCONS/ SFAC with whom Bank has tie up arrangements.   Formation of more and more Farmers' Clubs and organization of Kisan Goshthies for dissemination of latest farm information and to create awareness about our Schemes, should be encouraged.   In order to increase income level and reduce unemployment and poverty, efforts shall be made to promote micro-finance through formation and credit linkage of Self Help Groups.   Thrust should be given on financing to tenant farmers and oral lessee farmers by forming Tenant Farmers' Groups (TFGs).   Financing of Micro Enterprise Projects, especially to agriculturists, self-employed persons, the urban

poor and women beneficiaries shall be the thrust area.  In order to promote adequate finance to small artisans, self employed persons, other micro entrepreneurs, etc. credit be extended through PNB Swarozgar Credit Card Scheme. Committed effort will be made with the help of Business Facilitators and Business Correspondents to make banking services easily accessible to the vast unbanked population in rural and semi-urban areas to maximise financial inclusion.  Efforts shall be enhanced for making the Pilot projects under IT enabled financial inclusion a success and special thrust shall be given to increase transactions under FI project.  Focus shall be given for increasing the touch points of the Bank.  Implementation of the measures suggested by the High Level Committee on Lead Bank Scheme and as directed by Reserve Bank of India (including coverage of unbanked villages of population above 2000) will be an area of thrust.

 Bank will also explore new ventures in rural areas in partnership model with Govt. agencies/ corporates.  

 iii) Advances To Small & Medium Enterprises (SME): a) The Bank shall continue to lay emphasis on financing Small & Medium Enterprises and our existing SME credit portfolio shall be enlarged. Policy Package of Govt. of India 2006 shall be supported and popularized amongst our branches. b) Endeavour will be to achieve growth of more than 25% per annum in SME advances and to increase the share of the Micro Enterprises advances (i.e. manufacturing/ service enterprises having investment in plant and machinery/equipment up to Rs. 25 lakh/Rs. 10 lakh) in the advances to Small Enterprises to 60%. c) The Reserve Bank of India guidelines on financing to SMEs shall continue to be followed and incorporated in various schemes for financing SMEs. These guidelines on timely sanctioning of SME applications, margin, rate of interest, collateral security, etc shall continue to be adhered to. d) In line with the GOI policy directives to achieve 20% YoY credit growth in MSME sector, the Bank under Vision 2013 document envisages growth of more than 25%. The Bank has doubled the credit to MSME sector from Rs. 9076 crore( March 05) to Rs. 18198 crore (March 08) within three years against five years proposed under the policy package. The Bank is also ensuring that on an average at least five new SME cases are sanctioned at each of urban/ semi-urban branches per year.

 e) The Bank envisaged credit growth through MSMEs financial inclusion through collateral free and without third party guarantee lending by leveraging CGTMSE. For this, the bank has made Mandatory coverage under CGTMSE for loans up to Rs. 1 crore to Micro and Small Enterprises (MSEs).

 

f) The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 has broadened the definition as well as coverage of the Micro and Small Enterprises. They now include Service Enterprises which account for as much as 55 per cent of India’s Gross Domestic Product. The focused approach has been adopted by the Bank on Service Sector mainly on sectors like Transport/logistics, Educational Institutions, Hospitality, Health and Retail Trade and other emerging diversified Service Activities. The main contributions to MSME growth in future have been envisaged through Service Sector. g) The Bank has adopted Cluster approach - a vehicle of growth for manufacturing sector by Leveraging Cluster Based Lending Approach. Under Cluster Based approach, Bank has adopted 15 MSME clusters and more are likely to be adopted in the years to come. h) Disposal of Loan Applications within the prescribed time limit is ensured: Up to Rs. 2.00 lakh within 2 weeks (against RBI prescribed norms for loans up to Rs. 25,000/-), above Rs. 2 lakh & up to Rs. 5 .00 lakh within 4 weeks and above Rs. 5.00 lakh within 8-9 weeks.  i) Against RBI guidelines for Collateral free lending upto Rs 5 lakh to new Micro Enterprises, our Bank has made it mandatory to extend collateral free/without third party guarantee loans up to Rs. 100 lakh to the MSEs by the branches. Branch Managers are not empowered to accept Collaterals/Third Party Guarantee for extending loans up to Rs. 100 lakh. Next Higher authority only i.e. Circle Head can permit acceptance of third party guarantee/ Collaterals in exceptional circumstances. j) The Bank has approved independent rating agencies for rating of the SME units and extending interest concessions up to 0.50%. k) Special concessions to Women Enterprises have been extended in Margin Requirements and Interest Rates irrespective to the loan amount.  l) The Bank is financing Artisans, Craftsmen, Village & Cottage Industries and Industries falling under KVIC schemes like PMEGP (Prime Minister Employment Generation Programme). The small non – farm sector units in rural areas, minorities, SC/ST and other special groups are being financed in terms of GOI/RBI policy and shall continue to be given attention.

 m) District-wise project profiles – With a view to obviate the need for TEV studies for each project, common industrial activities prevailing in a district are being identified at Lead Districts of the Bank for preparation of standard project reports for loans up to Rs. 1 crore. Wherever, these Standard Project Profiles have been approved by the DLRC in the Lead Districts of the Bank, the Techno – Economic Viability Study is not required. Similar project profiles adopted at DLRC’s in other districts, where we are not lead bank, shall be adopted for financing.

 

n) Sufficient Loaning Powers have been vested to ensure faster disposal of MSME loan applications. However, Branch Managers have been vested with higher powers to directly dispose of proposals at Branch Level for financing micro enterprises (manufacturing/service) covered under CGTSME Scheme as follows:

  Scale –II Managers vested with the powers of Scale-III. Scale –III Managers vested with 125% of their vested

loaning powers. 

o) At present there is a system of on line filing of loan applications by SMEs. The proper tracking system will be developed in consultation with IT Division, HO and will be launched in due course of time.

 p) The SME Loan Applications are containing the Checklist of the documents required to be submitted by the borrower’s along with the application forms. Simplified loan application form (PNB- 1067) for loans up to Rs. 50 Lakh is available. The standardized loan application for loans up to Rs. 1 crore and also for working capital under Nayak Committee will be available at industry level after finalization by IBA. q) All sanctioning authorities are required to assess total requirement comprehensively of the unit / entrepreneur comprising term loan / project financing/working capital / non fund based facilities. They are also required to sanction working capital facility simultaneously to ensure that there is no delay to start commercial production.

 r) The Credit Committees have already been constituted at Circle Offices as well as at Head Office level, which examine the proposals received from the branches and accordingly makes recommendations to the sanctioning authority.

 s) Bank’s guidelines provide for extending Cash Credit facilities against combined level of stocks and receivables. The sundry creditors are netted against the sundry debtors and surplus receivables, if any are considered for DP after providing for adequate margin.

 t) The Bank is providing Working Capital through simplified method (Nayak Committee) i.e. providing 20% of the turn over as bank finance and 5% as promoter’s contributions. The Quarterly Monitoring System (QMS) forms have been simplified and Current ratio norms relaxed to 1.25:1.

 u) The Bank has 58 specialized SME branches & 465 SME focus branches to support finance to SME units. These branches shall be developed as centres of excellence in SME financing.

 v) For speedy disposal of MSME loan proposals;

SME Centres (HUB) have been set up at Delhi, Kolkata, Chennai, Mumbai, Ludhiana, Amritsar & Chandigarh.

  The Centralised Processing Centres have been set up at

Circle Offices. The Circle Heads are required to monitor these

CCPCs for quick disposal and sanction thereof by appropriate authority.

 w) The Bank has adopted the Code of Bank’s commitment to Micro and Small Enterprises.

 x) The Bank has implemented RBI guidelines of Debt Restructuring Mechanism for SMEs, which examine the sickness and put up rehabilitation. Bank has also set up Rehabilitation-cum-Care Centres at Circle Offices to guide the MSME units on the matters relating to their financial needs and the facilities available from the Banks/Govt./RBI. CD Ratio: In order to boost CD ratio of rural and semi urban branches, specific emphasis will be laid on marketing and financing under rural based lending schemes.  Endeavour would be to take up hi-value agri-projects and cluster based lending to small and medium enterprises, to enable bank to surpass the benchmark of 60 per cent under CD ratio of rural and semi-urban areas.

 With the above policy Bank aims to achieve the following National Goals under Priority Sector and Subsectors: 

Sector National Goal (Computed against ANBC or credit equivalent of Off Balance Sheet Exposure whichever is higher)

Priority Sector 40%Total Agriculture 18%Weaker Sections 10%Women beneficiaries 5%DRI Advances 1% of total advances as of

previous year 

iv) Export Credit Export credit shall also continue to remain our thrust area and our endeavour will be to achieve the ratio of export credit to net bank credit of 12% as prescribed by RBI. The bank has formulated Gold Card Scheme to boost export credit. v) Productive Sector: Productive sector consists of agriculture, export credit, SME, infrastructure, service sector and advances to industrial/manufacturing sector. It will be endeavour of the Bank to provide adequate finance to the productive sector all the time ensuring that it should not suffer at the cost of sensitive sector. II. OTHER STRATEGIES: 

i) Non-Fund Based Business Non-fund based business shall be increased so as to augment non-interest/fee based income. There is a need to explore more and more avenues under this category by adopting aggressive marketing strategies as also by raising the issue at various meetings/seminars/training colleges. Some of the strategies to be adopted in this direction are as under:  To explore the possibility of tie-ups/setting up of NFB limits in favour

of private sector banks for getting the business of issuing LCs/LGs on their behalf/adding confirmation to their LCs etc.  

To take fresh/enhanced NFB exposure in high value Corporate entities/PSUs.

  To perform the role of Debt Advisors, Arrangers and Loan

Syndicators.   To pursue with the existing clients under consortium/multiple

banking arrangements, for our pro-rata/higher share of NFB business.

  To give special emphasis to the “Infrastructure Sector” which has

witnessed healthy growth during the recent past due to special thrust on this sector in the recent Government Policies. Due to very high order of bank guarantee requirements of companies undertaking Central(NHAI)/State/World Bank aided infrastructure projects for construction of Roads, Power Generation/Distribution, Telecom, Ports, Pipelines etc., efforts will be to tap the huge potential available for increase of NFB business of the bank in this sector.  While considering non-fund based business, the aspect of additional cost towards requirement of capital may be kept in view.  Further, it should be ensured that non-fund based facilities like issuance of guarantees, opening of LCs, and acceptances are not extend to Non-Constituent Borrowers or/and Non-Constituent Member of a Consortium/Multiple Banking Arrangement.  As regards to the assessment of NFB facilities, the proposals for issue of non-fund based limits should be thoroughly appraised and assessed with the same diligence as is done in case of fund based limits by ensuring that projections and cash flows are realistic and in line with the past trend and the borrower would be in a position to perform the obligations/honour their commitments out of their resources as and when needed. 

ii) Take Over Of Accounts From Other Banks - Only borrowal accounts in "Standard Category" having Credit Risk Rating ‘BB’ or better can be taken over from other banks. However, CMD/ED may consider take over of B rated accounts in large and mid

corporate categories on merits of the case within his vested loaning powers and MC shall have full powers in this regard.

 Further, such borrowers should have earned net profit after tax in the immediate preceding three years and have sound financial position.  In order to further strengthen the eligibility criteria for takeover current ratio and debt equity ratio (as per DER policy) have been made as additional criteria while considering takeover of borrowal accounts. In cases where the current ratio and debt equity ratio, as advised vide L&A Cir.No.100 dt.28.09.2000 and 09 dt.15.01.09 respectively, are not within the prescribed range, Such cases may be considered as under:

  By the next higher authority within his vested loaning powers but

not below the level of DGM. In case of AGM headed Circles, such proposals shall be considered

by GM(HO) within his vested loaning powers. However, GM (Circle Office/HO) and above shall exercise their

vested loaning powers for considering takeover of such borrowal accounts.

The sanctioning authority should give due justification/comment for accepting the account for takeover duly highlighting the other favourable features of the account.  

- For accounts, which are in existence for less than three years, the unit should have earned cash profit during first year of commercial operation and from second year onward, the unit should have earned net profit after tax. However, in such cases, at least one audited balance sheet should be available before hand. However, for assessing the criteria of cash profit in the first year of commercial production, the working of 12 months should be reckoned.  - Borrowal account would be taken over from other banks only on selective basis on merits after obtaining prior approval from the next higher authority of the official under whose powers the takeover of the account (entire fund based and non-fund based limits) is proposed.  - Circle Heads in the rank of DGM/GM, GM(HO), ED and CMD may, however, permit takeover of borrowal accounts upto the extent of their vested loaning powers. In order to tap business potential, Circle Heads may permit incumbents of select branches to take over SME/Trading accounts to the extent of 50% of their normal loaning powers.  - The accounts of project financing where commercial production has not started or just started, takeover can be considered, if project is found technically feasible and economically viable subject to the fulfillment of certain conditions as advised in the relevant circular.  Besides, other guidelines for takeover of accounts shall also be adhered to.  iii)Bought over of loans from other banks 

Bank may consider buy out of loans from other institutions as a strategic decision after due diligence and ensuring that it will be a profitable proposition for the bank. In these type of bought over deals the bank may be required to make upfront payment towards NPV of interest charged by the selling institutions at the sell down rate. Further, such payment made to the seller is on account of net present value of difference in the interest rate recoverable as per the original sanction and the rate at which the said loan has been bought over by our bank and is called premium payment.  In other words, bank has to pay the outstanding amount plus premium payment (difference between NPV of interest chargeable as per sanction of the selling institution and interest rate at which loan has been purchased by our bank and the total amount has, therefore, to be debited to the term loan. In our books it will be a Term Loan like any other Term Loan with the only difference that a part of amount is towards premium payments.

iv) Large Corporate and Mid Corporate Branches (LCBs & MCBs) 

Bank has opened LCBs and MCBs equipped with necessary infrastructure and skilled staff to facilitate expeditious disposal of credit proposals beyond a cut off level. MCBs will handle proposals between Rs.5 crore and Rs.25 crore at places where LCBs are also located and loan proposals of Rs.5 crore and above at places where LCBs are not located. LCBs will handle loan proposals above Rs. 25 crore.

However, to give fillip to lending under this segment, the Mid Corporate segment will be brought under sharp focus of Circle Heads and Incumbents of MCBs, ELBs/VLBs.

 B. DECISION ON RISK ACCEPTANCE LEVELS: The bank has also taken various initiatives for putting in place the systems for risk acceptance, wherein informed decisions on credit sanctions are taken after taking care of the risk inherent in the borrower and returns desired by the bank. Certain policy initiatives taken are as:

 I. Linking Loaning Powers with Risk Rating The Bank has in place a multi-tier credit approving system. In order to enable the field functionaries for taking expeditious decisions and also to attract quality accounts, higher loaning powers have been vested with the sanctioning officials in the rank of CMs/AGMs/DGMs/Circle Heads/GMs (HO) in case of borrowers with credit risk rating of ‘A’ & above. In case of ‘AAA’ & ‘AA’ rated borrowers, 125% and in case of ‘A’ rated borrowers, 110% of their normal loaning powers shall be exercised.  No fresh exposure should be taken up to field level for borrowers under unfavourable industries irrespective of their credit risk rating. Only adhoc/additional/ enhancement facilities may be considered at the field level for borrowers under unfavourable industries. However, GM (HO) & above may consider fresh proposals under unfavourable industries within their vested loaning powers.

 In case of exporter borrowers, officials upto AGM level shall exercise powers up to 125% of aggregate commitment per borrower provided that additional 25% powers are utilized only for export limits. All officials can exercise their normal adhoc powers over & above the increased powers vested in them. However, Circle Heads/DGMs/GMs while exercising powers of 125% in case of ‘AA’ & ‘AAA’ rated borrowers have to ensure that the total commitment does not exceed the aggregate powers vested with the next higher authority.To regulate Bank’s exposure in case of low rated accounts and industries, the following restrictions imposed for exercising of loaning powers shall continue to be followed: 

Credit Risk

Rating of borrower

For other than unfavourable industries

* For unfavourable industries

‘B’ a) Enhancement/ additional/ adhoc exposure, officials at all levels can exercise their normal loaning powers.  b) For Fresh exposure, officials other than CMD/ED/GM(HO) shall exercise 75% of vested loaning powers except in case of ‘B –“ and ‘B’ rated borrowers where officials upto the level of Circle Heads shall not exercise loaning powers for taking fresh exposure. However, CMD/ED/ GM(HO) shall exercise their normal loaning powers for considering enhancement/ additional/ adhoc/ fresh exposure.

a) Enhancement/Additional/ Adhoc exposure, cases shall be sanctioned by the next higher authority not below the level of Circle Heads  b) No fresh exposure should be taken upto the level of Circle Heads However, CMD/ED/ GM(HO) shall exercise their normal loaning powers for considering enhancement/ additional/ adhoc/fresh exposure.

‘C’ & ‘D’ No fresh exposure is to be taken in ‘C’ & ‘D’ rated accounts. However, MC is empowered to consider fresh exposure in case of ‘C’ & ‘D’ rated borrowers. Renewals shall be considered by competent authority if exit is not feasible. Adhoc/ additional/ enhancement facility is to be sanctioned by the next higher authority not below the level of Circle Heads. However, ED/CMD shall exercise their normal loaning powers for considering enhancement/additional/ adhoc exposure.

 * At present, two industries i.e. Power-SEBs and Telecom Equipments have been classified as ‘Unfavourable’ in terms of L&A Circular No. 152 dated 15.12.2009. In case industry is upgraded, the restriction shall be removed automatically. II. Other Loaning Powers: i) Sanction of limits in anticipation of approval by MC 

Sanction of limits/facilities in anticipation of approval by MC shall be considered in case of Existing as well as Fresh Borrowers by CMD/ED for meeting emergent needs and ratification of such approval should be moved immediately to MC. ii) ‘In Principle Consent’ In case of genuine and urgent cases falling under MC/Board sanction, “In Principle” consent may be given as under:

 - Fresh Borrowers: By CMD and in his absence by ED - Existing Borrowers:CMD/ED may convey “In Principle” consent.However, in all cases, the funds shall be released only after complete appraisal and regular sanction by the Sanctioning Authority. iii)Sanction of limits to NBFCs: All fresh proposals/enhancement/additional/adhoc/temporary facilities to NBFCs shall be considered at HO level only. However, the cases for renewal/review of the existing facilities may continue to be considered by Incumbents of LCBs/Circle Heads (DGM/GM) and above. The powers vested with Incumbents of LCBs/Circle Heads (DGM/GM), GM (HO), ED & CMD for considering advances to Non Banking Finance Companies (NBFCs), are as under: -  

Incumbents of LCBs/Circle

Head (DGM/GM) *

GM (HO) 

ED CMD

25% 50% 

50% 

50% 

of vested loaning powers for fund based secured advances Further, GM (HO) & above may sanction adhoc facilities to NBFCs as under:-

 Adhoc facilities (NBFCs) Incumbents of

LCBs/Circle Head (DGM/GM)

*

GM(HO) ED CMD

In emergent circumstances, drawings in SECURED FUND BASED LIMITS in excess of sanctioned limits, within available DP, may be allowed normally upto 3 months by Circle Heads & above & in exceptional circumstances in highly deserving cases for a maximum period upto 4 months by Circle Heads & GMs and upto 5 months by ED & CMD, subject to:

Nil 

30%  

35% 

50% 

 of Sanctioned Limit

 OR

(Rs. Lacs)

Nil 400 1125 1500

 whichever is lower

 * No power for Circle Heads in the rank of AGM. Officials while permitting the adhoc facilities in case of their own sanction shall ensure that the total exposure does not exceed the loaning power vested in them in case of NBFC financing. iv) Fresh advances to stand alone Sponge Iron Units are to be

considered at HO level only. 

v) All real estate proposals above Rs.100 lac including hotel industry (excluding hotels falling under SME segment), finance against lease rentals and advances under retail lending schemes backed by mortgage of IPs shall require administrative clearance from ED/CMD. Finance to Retail Traders under SME sector for purchase of shop/show room are exempted from the pre-condition of obtaining administrative clearance from GM (Circle Office)/Field GMs /GM/CGM, CAD, HO/ED/CMD.

 The administrative clearance up to Rs. 100 lac shall be given by GM(CO/Field/HO). Loaning powers for sanction of proposals for Hotels including guest houses shall be exercised by Chief Managers and above within their vested loaning powers.

 vi) All proposals relating to Cement Industry are to be considered at

Head Office level only. 

vii) All proposals relating to Civil Aviation Sector shall be considered at Head Office level.

 viii) Further exposure should not be taken in Rubber and Tea industries.

In case Circle Heads find a bankable proposal, they may recommend it to CAD, HO for sanction by the Board on merits. However, competent authority may sanction adhoc/additional/enhancement facilities in case of existing accounts in Tea Industry on merits.

 ix) Proposals for financing Windmill Power projects shall be considered

at the level of Circle Heads in the rank of DGM & above within their vested loaning powers.

 x) Adhoc limits:

 To meet the emergent requirements in respect of standard account whose viability is not in doubt as at present, officials may permit adhoc facilities in exceptional circumstances in highly deserving cases after a complete appraisal thereof giving proper justifications, as under: Sl.No.

Adhoc Facilities to be permitted by officials upto the level of:

Time period up to which Adhoc Facilities in Secured Limits can be considered up to a maximum of:

1. AGMs 3 Months2. DGMs/GMs 4 Months

3. ED/CMD 5 Months Such powers shall be exercised by the various officials discreetly and not in a repetitive and routine manner.  To meet the genuine requirements of borrowers, need based limits shall be considered rather than allowing frequent adhoc facilities. However, roll over of adhoc facilities should not be permitted beyond the period mentioned above. xi) Confirmation of Action: The officials shall exercise the vested loaning powers diligently and shall not exceed the vested powers. However, in exceptional circumstances and for bonafide exigencies, wherever such powers are exceeded, the reporting the same immediately but in any case not later than three days from the date of the transaction to the controlling authority for confirmation by the competent authority, shall be done on the prescribed format. The detailed guidelines in this regard have been advised vide L&A Circular No. 8 dated 09.02.2010. III.Linking of pricing with credit risk rating: The pricing is linked with credit risk rating. Interest rate is charged depending upon the quality of asset. In normal course of business, better-rated accounts are priced at lower rate of interest as compared to low rated accounts. However, in the larger business interest of the bank, the competent authority can permit lower than card rates on case to case basis strictly on merits by recording the reasons/justification for making the exception. In respect of borrowal accounts availing limits over Rs. 20 lakhs, interest rates have been linked with the credit risk rating with certain exceptions.  Situations may arise where the borrowers would like to know about the rationale of their rating. Borrowers may be informed about their weak areas such as Financial, Business/Industry, Management or Conduct of Account. The rating report/individual parameters in detail are not to be disclosed to them. a. Benchmark PLR (BPLR) The Bank will be working on Base Rate with effect from 01.04.2010, once RBI finalizes its instructions on this score. However, in the meantime, Benchmark PLR (BPLR) determined after taking into account actual cost of funds, operating expenses and a minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin, shall continue to be the reference rate. At present, BPLR has been fixed at 11% w.e.f. 01.05.2009. Further, for determining interest rates on all term loans repayable in 3 years & above, a term premia of 0.50 is to be added for arriving at interest rate over and above the card rate for the relevant category. BPLR is the reference rate for determination of rate of interest for the borrowal accounts. As regards rates of interest for advances above Rs. 2 lakhs, different rates are prescribed depending upon the

activity/sector of the borrower, recovery position of the sector, risk premium applicable for particular borrower/ industry, etc. Interest rates for loans up to Rs. 2 lakh should not exceed BPLR. b. Sub-BPLR LendingIn order to remain competitive in the market, sub-BPLR lending may continue to be permitted by CMD/ED by making comparison with the yield on government securities of corresponding maturity, cost of funds and opportunity cost, as under: 

x) Sub-BPLR Lending permitted by CMD: Sub-BPLR lending may be permitted by CMD in case of MC sanctions as well as in sanctions upto his vested powers, upto 5.50% below BPLR, on case to case basis, in respect of the following:- i) Standard Accounts having minimum ‘AA’ rating as per risk rating

model of the bank; ii) Public Sector Undertakings of good repute, showing profits in the

latest period and/or having a positive fund flow/escrow arrangement, without reference to their rating;

iii) Export Credit, without reference to rating. Further, CMD can also permit upto 4% below BPLR, on case to case basis, in case of MC sanctions as well as in sanctions upto his vested powers, in respect of following borrowers:- i) Standard Accounts having rating of ‘B', 'BB’ or ‘A’ as per

risk rating model of the bank and satisfactory conduct of the account. In cases where Risk Rating could not be assigned or is not applicable, overall business considerations, performance, value of account and relationship are to be taken into account.

ii) Advances against RBI Relief Bonds/Govt. securities/KVPs/ NSCs/LIPs/other such securities.

iii) Advances under various retail segment schemes. y) Sub-BPLR Lending permitted by ED:

 ED can permit relaxation in rate of interest upto BPLR minus 1.50% (inclusive of term premia) in case of sanctions upto his vested powers, on case to case basis, in respect of the following:-

 i) Standard Accounts having minimum ‘B’ rating as per risk rating

model of the bank and satisfactory conduct of the account. In cases where risk rating could not be assigned or is not applicable, overall business considerations, performance, value of account and relationship are to be taken into account.

ii) Public Sector Undertakings of good repute, showing profits in the latest period and/or having a positive fund flow/escrow arrangement, without reference to their rating.

iii) Advances against RBI Relief Bonds/Govt. securities/KVPs/NSCs/ LIPs/other such securities.

iv) Advances under various retail segment schemes.

 However, in case of export credit, without reference to rating upto BPLR minus 4%. z) Discretionary powers vested with the Circle Heads (AGMs/DGMs)/ GMs(HO/CO/Field) for permitting relaxation in interest rates:

  

S.No.

Authority Can permit relaxation in ROI upto

1. Circle Heads (AGMs/DGMs) Upto Card rate minus 0.50%2. GMs (HO/CO/Field GMs) Upto Card rate minus 1.00%

  The concessions shall be permitted in case of borrowers with credit

risk rating of ‘BB’ and above (in cases where interest rates are linked with credit risk rating of the borrower).

  No powers are to be exercised in case of loans to B, C & D rated

borrowers, retail loans, and export credit. 

In cases where interest rates are not linked with credit risk rating of the borrower, reduction may be considered based upon perceived value of the account, business considerations, tenor of the loan, collaterals, etc.

  All such concessions ceded should be justified by revenue

neutralization through other income streams of the constituent, be it liability, third party product (TPP), retail banking products.

  The aspects such as cost benefit analysis, risk perceived in the

account, non interest income, other ancillary business such as opening of borrowing company’s staff accounts thereby making avenues for selling retail products etc., should also be kept in view to assess the value of the account.

  The potential loss of business shall not be a valid reason.

  No discretionary powers for reduction in rate of interest shall be

exercised in cases where card rate is below BPLR (i.e. sub-BPLR). 

In cases where concession under discretionary powers has been allowed on case to case basis, the rate of interest chargeable in the account must not be allowed to go below prevailing BPLR.

  In all such cases where special concessions in rate of interest have

been given to specific segments like Rice Shellers/SME/Exports, this discretion is not to be exercised.

 c. Short term loans at fixed interest rates / rates linked with BPLR/ Rates Linked with Market Benchmarks

 In order to invest our surplus funds depending upon the market conditions and to earn better yield as compared to the Call Money/Repo Markets etc.,

short-term loans shall be considered at fixed interest rates/rates linked with market benchmarks/BPLR, upto 1 year to corporate borrowers (new as well as existing) as under: 

For loans above Rs.500 crore with minimum risk rating of ‘A’ as per credit risk rating.

For loans upto Rs.500 crore with minimum credit risk rating of ‘B’. Public Sector Undertakings without reference to crdit risk rating. Short term loans are given for minimum amount of Rs. 10 crore within overall individual/group borrower ceiling prescribed from time to time. Such loans can be considered only by ED/CMD/MC to the extent of loaning powers vested in them.   In case STL is to be considered in the sensitive sectors such as Capital

Market/Commercial Real Estate then borrower should qualify for credit risk rating of ’ A’ and above.

In case STL is being considered under project financing for meeting the temporary mismatch of funds, it should be ensured that the financial closure of project is duly achieved.

In case of project financing, the STLs may also be considered for pre-operative expenses.

In case STL is considered as a substitute for working capital limits which are unavailable due to non sanction by other banks or due to any other reason like untied portion under the consortium arrangement, then it should be within the duly assessed PBF subject to the availability of DP. Further, all the members of consortium should also be informed to ensure that PBF is not breached.

The general lending norms including the purpose and end use of funds should be ensured to avoid diversion of funds to the sensitive sector such as Capital Market, Commercial Real Estate, etc. STL should not be sanctioned to adjust the existing working capital limits.

 The cash flow statement/tie up of funds must be obtained and thoroughly examined to ensure timely repayment of loan. Further, while considering Short Term Loans the credit risk rating reckoned should not be based upon audited Balance Sheet more than 15 months old. In cases where rating is based upon the Balance Sheet older than 15 months then latest half yearly rating review conducted on the basis of latest published quarterly/half yearly results/data submitted I n QMS forms should also be reckoned as under:  The cases where score is upto 40, i.e. ‘Outlook Negative’ should not be

considered for sanction till the fresh rating based on the latest audited results is conducted.

The cases where score is above 40, i.e. risk profile is ‘Outlook Stable’ or ‘Outlook Positive’, may be considered for sanction on merits.

 The ceiling for aggregate Short Term Loans is fixed at 18% of the total advances of the bank as at close of the previous quarter. IV.Exposure in Weak Accounts 

Based on RBI guidelines on Special Mention accounts, the concept of weak accounts was introduced to capture early warning signals in the borrowal accounts. An account is considered as ‘weak’ if (i) It is irregular/overdrawn (except where irregularity is due to interest) for more than 60 days, and (ii) If PMS rank is 6 & above (in cases where preventive monitoring system is applicable). For identification of ‘weak accounts’ under standard category, adverse features as advised vide L&A Circular No. 32 dated 31.3.2005 should also be kept in view.

 An early warning system, called ‘PMS’ is in place for borrowal accounts of Rs.1 crore and above. Bank endeavours to exit from accounts showing early warning signals and having ‘C’ or ‘D’ (high) risk-rating based on credit risk rating/PMS ranking.

 

C. ADHERENCE TO PRUDENTIAL EXPOSURE NORMS: 

Exposure Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments) as well as certain types of investments in companies. The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at exposure limit. Further, non-fund based exposure should also be reckoned at 100 percent of the limits or outstandings, whichever are higher. In case of fully drawn term loans, where there is no scope for re-drawal of any portion of the sanctioned limits, the outstanding shall be reckoned as exposure. However, in the case of other term loans, the exposure shall be computed as usual i.e. “sanctioned limits or outstandings, whichever are higher”. Banks have been given freedom to fix internal limits on their exposure to specific industries/sectors keeping in view their performance and risk perceived therein. Accordingly, Board has approved internal ceilings and sub ceilings in respect of various segment/ sectors viz. exposure to real estate, aggregate exposure to NBFCs, short term loans etc. with reference to the total outstanding advances of the previous quarter. Thus for computing the exposure vis-à-vis the internal ceilings, the present outstanding in the particular sector is taken as numerator and the gross outstanding advances at the close of previous quarter is taken as denominator unless provided otherwise specifically. In order to avoid any ambiguity in the matter in future, it is advised as under: 

i) For computing the exposure for monitoring of prudential limits fixed by RBI viz. bank’s exposure to single/group borrower, exposure to single NBFC, capital market exposure, advances to Indian joint ventures/wholly owned subsidiaries abroad etc., higher of outstanding or sanctioned limits should be reckoned as per RBI’s stipulations.

 ii) For computing the various internal ceilings fixed by Board in respect

of industry exposure, unsecured loans, aggregate exposure to NBFCs, real estate, windmills, short term loans, etc., the outstanding amount should be reckoned in the numerator ignoring the sanctioned limit.

 iii) Further, for computing the internal ceiling the outstanding advances

as on close of previous quarter should be reckoned as the denominator instead of outstanding as on close of previous financial year unless specifically mentioned.  a. Prudential exposure limit for single/group borrowers: In terms of RBI guidelines, credit exposure ceiling shall not exceed 15% of the capital funds in case of individual borrowers (20% provided the additional 5% is on account of credit to infrastructure projects) and 40% of capital funds in case of group borrowers (50% provided the additional 10% is on account of credit to all infrastructure projects). Bank may in exceptional circumstances, with the approval of its Board,

consider enhancement of the exposure upto a further 5 percent over & above the above ceilings. Accordingly, the prudential credit exposure ceiling prescribed by RBI can be exceeded upto 5% of capital fund of the bank in case of: -PSU borrowers based on their cash flows; -Non-PSU borrowers having risk rating ‘AA’ & above. Further, RBI has revised the above exposure limit (i.e. 15 % in case of single borrower) to 25% of the capital funds, only in respect of Oil Companies who have been issued Oil Bonds which do not have SLR status) by Government of India. In addition to this, in exceptional circumstances, bank may consider enhancement of the exposure to the Oil Companies upto a further 5 percent of capital funds as hithertofore.  Within the ceilings prescribed by RBI, the internal exposure ceilings as a trigger point have also been fixed as under:-

 For individual borrowers:@

‘AAA’/ ‘AA’ Rated Accounts, PSU borrowers - 15% of capital fund (20% provided additional exposure of 5% is on account of credit to infrastructure projects). ‘A’ Rated Accounts - 14% of capital fund (17% provided additional exposure of 3% is on account of credit to infrastructure projects).  ‘BB’/’B’ Rated Accounts - 12% of capital fund (15% provided additional exposure of 3% is on account of credit to infrastructure projects). ‘C’ Rated Accounts - 9% of capital fund (12% provided additional exposure of 3% is on account of credit to infrastructure projects). ‘D’ Rated Accounts - 6% of capital fund (9% provided additional exposure of 3% is on account of credit to infrastructure projects).

For group borrowers

In case of Groups with accounts having higher as well as lower ratings, the exposure ceiling for Group borrowers shall remain/continue at 30% of capital fund of the Bank (40% provided additional exposure of 10% is on account of credit to infrastructure projects). Keeping in view the strategic importance of infrastructure sector, it has been decided that the ceiling for Group borrowers for this sector be kept at the level of RBI prescription i.e 40% of capital funds (50% provided the additional exposure is on account of credit to all infrastructure projects). CAD, HO may, however, fix lower limit on case by case basis. 

 @ The above ceilings shall not be applicable in case of financing NBFCs (for which separate ceilings are given at point No. e(i) in subsequent paras.

- In respect of Partnership and Proprietor concern, exposure to a borrower

by way of Fund Based/Non Fund Based facilities shall be restricted to the limits mentioned below:

 Proprietorship Concerns Rs. 30.00 Crore. Partnership Concern Rs. 75.00 Crore.Single entity with constitution as Society, Trust & HUF

Rs. 100.00 Crore.

 b. Prudential limit for substantial exposure:

 Substantial Exposure is defined as sum total of exposures assumed in respect of those single borrowers enjoying credit facilities in excess of a threshold limit of 10% of capital funds of the Bank as on 31.03.2010. In order to reduce concentration risk in a few accounts, Substantial Exposure limit has been fixed as under:- 

Private Sector Borrowers 100% of capital funds of the Bank @Public Sector Borrowers 300% of capital funds of the Bank @

 @ as on 31.03.2010 c. Maximum Industry Exposure Limit: The bank has developed a model for fixation of industry wise credit exposure ceilings. The model captures external factors like rating of industry by external agency, nature of industry and its importance in economy as well as internal factors like level and trend of asset impairment, exposure level and quality of exposure in the industry. This model provides scientific assessment and corresponding exposure ceiling level to an industry. Existing ceilings prescribed in this regard based upon the data as on 31.03.2009 are given in Appendix. These limits shall be reviewed on the basis of data as on 31.03.2010. As the ceilings proposed are internal ceilings to achieve diversified growth of portfolio and reduce portfolio concentration, it is provided that the monitoring against such limits would be based on actual outstanding. However, undisbursed term loan amounts in any industry shall also be monitored closely.  Further, the industry-wise exposures shall also be monitored closely by CAD, HO to especially those industries which have reached trigger level of 85% of exposure limit so the stances of breach of ceiling could be averted. d. Unsecured Exposure Ceiling : The exposure including all funded and non-funded facilities, where the realizable value of tangible security is not more than 10%, ab-initio of the outstanding exposure shall be treated as ‘Unsecured Exposure’, which should not exceed 25% of the total outstanding advances. The said ceiling shall be reviewed on the basis of data as on close of previous quarter. 

e. Quantitative Exposure Ceiling: Following exposure ceilings have been prescribed with the basic aim of achieving a sound Credit portfolio:- 

i) NBFCs: The exposure ceiling for single NBFCs be reduced from existing 10% to 7% of Capital Funds of the Bank as per its last audited balance sheet (12% in case of infrastructure sector. Further in case of NBFC Group exposure, ceiling be reduced from existing 30% to 20% (30% in case of infrastructure sector). Ceiling for bank’s aggregate exposure to all NBFCs has been put at 7% of bank’s gross advances at the close of the previous quarter. For the purpose of calculation of ceiling, infusion of capital funds after the published Balance Sheet date may also be taken.  However, Bank finance to Residuary Non-Bank Companies (RNBCs) registered with RBI will be restricted to the extent of their NOF.  ii) Film industry sector: So as to restrict the exposure in this sector there is a stipulation of overall ceiling of Rs. 20 Crores for fresh exposure to be taken during the current year.

 iii)Real Estate: It being a sensitive sector, the overall exposure ceiling for real estate sector on a review has been reduced from 23.00% of the total advances of the bank as at close of last quarter to 20.00% of the total advances of the bank as at close of last quarter. Further, within the overall exposure ceiling of 20.00% stipulated for real estate sector, segment-wise sub-ceilings have also been revised. The existing vis-à-vis the revised exposure ceiling is as under:

 S.No

Segment Ceiling (% of the total advances of the bank as at close of last quarter)

(i) Exposure on NHB & HFCs 5.00%

(ii) Commercial Real Estate 10.00%

  a) Land developers & builders 6.00% (out of 10%)

  b) Other commercial real estate i.e. IPs(commercial), lease rentals, Hotels etc.

4.00% (out of 10%)

(iii) Residential mortgages No sub-ceiling(iv) Total 20%

 CAD, HO to continue to monitor the internal ceilings of real estate sector as per extant guidelines on quarterly basis, by putting up quarterly review to Board, to ensure that the same is well within the prescribed ceilings.  In case, overall ceiling breaches, due to increase in exposure under housing loan (Residential mortgages for which no sub-ceiling has

been prescribed), the ceiling shall not be treated as breached. In case of such breach due to residential mortgages, the position shall continue to be put up to Board by CAD, HO along with quarterly review for ratification. Further, in case of breach in the above noted ceilings, present guidelines of placing the same to the Board, in its next meeting for ratification, shall also continue to be followed by CAD, HO.  Guidelines on classification of Commercial Real Estate advances have been revised by RBI and circularized vide L&A Cir. No.124 dated 1.10.2009. As per the same while classifying the exposure as CRE or otherwise, a note giving rationale/justifying the classification should be made part of the sanction. It is possible for an exposure to get classified simultaneously into more than one category, as different classifications are driven by different considerations, such as CRE, infrastructure, capital market exposure etc. In that case, in all regulatory reporting to RBI, the exposure should be reported under all relevant classifications, with a foot note to avoid double counting and would attract all regulatory concessions and limits, if any, applicable to the classification. In such cases, the exposure would be reckoned for regulatory/ prudential exposure limit, if any, fixed by RBI or by the bank itself, for all the categories to which the exposure is assigned. For the purpose of capital adequacy, the largest of the risk weights applicable among all the categories would be applicable for the exposure.  For instance, lending in respect of Special Economic Zones (SEZs) has been defined as one of the categories eligible for classification as ‘Infrastructure Lending”. Since certain types of exposures in respect of SEZs would have the characteristics of CRE Exposure as per the revised CRE guidelines, these would simultaneously be classified as both CRE Exposure and Infrastructure Lending. In such cases, the risk weight applicable would be that for CRE exposure and not related to borrower’s rating. However, the exposure would be eligible for all the regulatory concessions available to “Infrastructure Lending” as per extant RBI guidelines. Further, all real estate proposals above Rs.100 lac including hotel industry (excluding hotels falling under SME segment and Retail Traders under SME sector for purchase of shop/show room), finance against lease rentals and advances under retail lending schemes backed by mortgage of IPs shall require administrative clearance from ED/CMD. The administrative clearance upto Rs. 100 lac shall be given by GM(CO/Field/HO). Loaning powers for sanction of proposals for Hotels including guest houses shall be exercised by Chief Managers and above within their vested loaning powers. While appraising proposal for term loan for real estate, Pre-Sanction Credit Appraisal and conduct of due diligence be done as per Bank norms. Further, while appraising such proposals, Financial viability and Managerial competence should be carefully studied and analyzed and if considered necessary, the services of Bank's

technical officers may be utilised for the purpose. For complex projects, assistance of outside consultants may be obtained.  As RBI has prescribed uniform risk weight at 100% for real estate, external rating for such projects need not to be insisted upon. iv) Capital Market sector: In terms of revised RBI guidelines, the ceiling for capital market exposure is fixed at 40% of its net worth on a solo and on consolidated basis. The following advances shall form part of Capital Market exposure:

 i) Advances to individuals

 a) for investment in equity shares (including IPOs/ESOPs),

convertible bonds & debentures, units of equity-oriented mutual funds etc.

b) against security of shares, convertible bonds/debentures and units of equity oriented mutual funds etc.

 ii) Advances to corporates

 a) For any purpose against the primary security of shares,

convertible debentures/bonds and units of equity oriented mutual funds

b) For any purpose where shares etc. are kept as collateral security (to the extent secured only by collateral security of shares, where no other primary security is available)

 iii) Advances to Stock Brokers/ Market Makers

a) Secured/Unsecured advancesb) Guarantees issued on behalf of Stock Brokers/Market

makers c) For margin trading

 iv) Advances to corporates for meeting promoters’

contribution to the equity of new companies in anticipation of raising resources

 v) Bridge loan to companies against expected equity

flows/issues 

vi) Irrevocable Payment Commitments (IPCs) issued on behalf of Mutual Fund in favour of Stock Exchanges;

 vii) Advances sanctioned in favour of equity oriented Mutual

Funds. Bank has stipulated following ceilings in respect of advances forming part of exposure to capital market:

  An overall ceiling of 20% of net worth of the bank as on 31st

March of the previous year for advances against shares to

different categories of borrowers, forming part of exposure to capital market.

A sub-ceiling of 10% of net worth of the bank as on 31st

March of the previous year (within the aforesaid ceiling of 20% of net worth of the bank), for aggregate advances to all stock brokers (fund based & non-fund based).

A sub-ceiling of Rs. 50 crore (within the aforesaid ceiling of 10% of net worth of the bank), for advance to any single stock broking entity (fund based & non-fund based) including its associate/inter connected companies.

A ceiling of Rs. 10 lakh and Rs. 20 lakh for financing individuals for acquiring shares under IPO/FPO and ESOP respectively. 

The maximum ceilings prescribed by RBI for advances to individuals against security of shares and debentures is Rs. 10 lakh against physical shares and Rs.20 lakh against dematerialised shares from entire banking system.

 Further, based upon RBI guidelines, it is advised that while computing bank’s exposure to capital market, the following components should not be reckoned as bank’s exposure under capital market:

  Infrastructure advances, if secured by pledge of promoters’

shares in the SPV of an infrastructure project.  Bank’s exposure to Stock Brokers under the currency

derivative segment including BGs issued under this segment. 

STATUTORY PROVISIONS Statutory provisions of the Banking Regulation Act, 1949 as under should be strictly observed while allowing advances against shares (both in physical and dematerialised form):- Section 19(2) & (3) A Bank cannot hold shares in any company, whether as pledgee, mortgagee or absolute owner of an amount exceeding 30% of the paid-up share capital of the company or 30% of the own paid up share capital and reserves, whichever is less. Further a bank cannot hold shares, whether as pledgee, mortgagee or absolute owner, in any company in the management of which any Managing Director or Manager of the bank is in any manner concerned or interested. To ensure compliance, the prevalent system of taking prior approval from CAD, HO before accepting shares as security (primary/collateral) should be strictly followed. 

Section 20(1) (a) A Bank cannot grant any loans or advances on the security of its own shares. v) Wind Mills: Credit exposure ceiling in respect of aggregate outstanding credit (FB & NFB) to wind mills has been fixed at 1% of the total advances of the bank as on close of the previous quarter. vi) Internal ceilings, wherever prescribed, are to be monitored based upon the outstanding exposure vis-à-vis total outstanding advances as on close of the previous quarter. CAD, HO to monitor various exposure ceilings on an on going basis.

 2.2.3 PROCESS AND SYSTEMS A comprehensive credit risk management process encompasses the following steps: 

A. Credit Risk Identification and MeasurementB. Grading of Borrowers under the Rating System C. Reporting and analysis of Credit Risk D. Portfolio ManagementE. Use of Securities as Risk MitigantsF. Use of Guarantees as Risk Mitigants

 A. Credit Risk Identification and measurement

 Credit risk management process involves identification, measurement, monitoring and control. The bank has put in place strong credit risk management structure, which ensures continuous identification of possible areas, which may adversely affect the credit quality of a borrower and/ or portfolio. The process of identification of credit risk is done by: 

Identifying potentially good and weak industries to manage risk in portfolio through industry wise exposure ceiling model.Identifying potential credit risk in a new as well as existing borrower through various credit risk rating models.Identifying signals of weakness in an existing borrower through preventive monitoring system.

- Identifying weak accounts having incipient sickness. 

1. Industry Rating Bank has subscribed to the ICRA reports and industry ratings. It has also subscribed to CRISIL 15 emerging segments. The industry reports are available on our e- circular site for ready reference of our field functionaries engaged in appraising/sanctioning credit proposals. Further, we are also circulating the quarterly updates on industry ratings by ICRA from time to time latest being vide L&A Cir. No. 152 dated 15.12.2009 , which are used as inputs in our Credit Risk Rating Models.  The industries not rated are to be treated as neutral so far as applicability of loaning power restrictions are concerned.

Besides, other guidelines on the subject shall be adhered to. 2. Credit Risk Rating Models: To measure risk in individual borrowal accounts, the bank has identified various segments viz. large corporate, mid corporate, small, NBFC, New projects, Banks, Retail, etc. Borrowers in these segments reflect similarity of potential credit risk factors and as such can be rated using the single model for the segment. Parameter under these models captures potential credit risk both internal as well as external, which may affect the credit quality of a borrower. The credit risk rating awarded to a borrower is subject to review from time to time. These models have already been implemented at the field level and results of these models are regularly monitored to calibrate/ refine the models. The bank is also aggregating the credit risk in its rated portfolio and monitoring the same. Advance portfolio risk identification and measurement models shall be adopted by the bank on completing the measurement of credit risk in its entire portfolio.  All existing borrowers above a thresh hold limits are also subject to a continuous preventive monitoring system. This system helps in identifying accounts developing adverse signals to initiate corrective measures. The bank also has system of identifying and monitoring weak accounts which develop incipient sickness. Experience gained through these systems is used in refining the various models. Further, it is also ensured that business unit while framing schemes of lending also identify potential new credit risk factors so as to analyze the impact of same and correspondingly provide for mitigation. The bank has developed the following models/tools: S.No. Credit Risk Rating

ModelApplicability

Total Limits Sales

1 Large Corporate Above Rs. 15 Crore (OR)

Above Rs.100 Crore, except Trading concerns

2 Mid Corporate Above Rs.5 Cr and up to Rs.15 Cr. (OR)

Above Rs.25 Cr and up to Rs.100 Cr.

All trading concerns falling in the Large Corporate category shall also be rated under this model

3 Small Loans Above Rs.50 lakh & up to Rs.5 Cr (AND)

Up to Rs.25 Cr.

 

4 Small Loans II Above Rs.2 lakh & up to Rs.50 lakhs

5 NBFC All Non Banking Financial Companies irrespective of Limit

 6 New Projects Rating

modelAbove Rs. 5 Cr. (OR)

Cost of Project above Rs.15 Cr.

7 Entrepreneur New Business Model

Borrower setting up new business and requiring finance above Rs 20 lac upto Rs. 5 Cr (AND)

Cost of Project upto Rs.15 Cr.

However, all new trading business irrespective of limits shall be rated under this model

8 Half Yearly Review of Rating

i) All listed companies rated on large / mid corporate rating models.

ii)Other borrowal accounts rated on large / mid corporate rating models availing limits (FB+NFB) above Rs.50.00 crores from our bank.

9 Facility Rating Framework

Assigning rating to facility sanctioned to the borrower based on default rating and securities available

10 Credit Risk Rating models for Banks/ FI

All banks and Financial Institutions

 Credit Scoring Models: Similarly, to evaluate risk in retail segment, scoring models for all the retail lending schemes except PNB Baghban Scheme (Scheme for reverse mortgage) and Loan against Gold and Jewellery with limits up to Rs. 50.00 lacs are developed based on scientific application and have been put on central server under the name PNB SCORE. The models for exempted schemes have not been developed as the security charged is the primary mitigant and personal character does not play any significant role. All the retail loans except the exempted categories will now be sanctioned based on the scores obtained by individual borrower and all retail loan applications coming for sanction are necessarily to be scored and rejection would be based on the score obtained. The cut off score for sanction will be fixed by RBD Head Office from time to time based on performance of the models, market conditions and corporate policies. The applicants getting lower scores than the cut off score and the where the sanctioning authority is confident about the fairness of the proposal, the same will be considered by one level higher authority for sanction, who shall also record the reasons at the time of sanction of such applications and will ensure to get it recorded in PNB SCORE in the system. Experience gained through the scoring models will be used to validate the models.

 Eight models have been developed to cater to all retail lending schemes except PNB Bagban and Loan against Gold and jewellary. The models are as under:  

1) Conveyance Loan2) Housing Loan3) Education Loan4) Doctors’ Loan5) Personal Loan(Pensioner)6) Personal Loan (Others)7) Traders’ Loan (New)@8) Traders’ loan (renewal)@

 @ Now categorized under SME

 Similarly for SME following segments have been identified, which can cater to the requirements of the schemes under SME sector: 

1. SME below Rs.5 Lacs – New Cases.2. SME with limit of Rs.5 Lacs and above up to Rs. 50 lacs for

manufacturing activities – New Cases.3. SME with limit of Rs.5 Lacs and above up to Rs. 50 lacs for Service

sector – New Cases.4. SME Below Rs.5 Lacs – Renewal/Enhancement.5. SME with limit of Rs.5 Lacs and above up to Rs. 50 lacs –

Renewal/Enhancement. Models for the above SME segments have been developed and IT Division has been developing software for implementation as per Board approved plan by SME Division. It will be endeavour of the bank to develop Scoring Models for PSLB schemes including Agriculture Loans for loans up to Rs 50 Lacs and to place on central server for use by all branches/hubs/CCPCs as the case may be. In order to provide robust risk management set up and data required for the same, the Bank has already placed all the above credit risk rating models applicable to borrowers in the Central Server system for conducting ratings online.  In addition, the following 3 models are also in force: S.No. Credit Risk Rating

ModelApplicability

1 Exposure to undertakings of State

All states within Union of India

2 Exposure Ceiling Model for various industries

All industries where the bank has substantial exposure

3 Segment Rating Methodology

Pool wise default and ratings approach for loans upto Rs.50.00 lakhs and loan under exempted category of rating.

 Though, standardized approach gives cognizance to ratings of ECAI, stabilization of internal credit risk rating process is one of the most important criteria for our moving towards adopting IRB approach for calculation of capital charge for credit risk. Hence, continuous efforts for implementation of credit risk rating models and increasing our rated portfolio are being made. Banks must meet certain minimum requirement as prescribed in Basel II before switching over to advanced approaches. 3. Categories of “Advances” exempted from Risk Rating/Scoring Models  Out of the total Credit portfolio of the bank covered under the purview of different rating models, the following categories of advances are exempted for rating purposes:

a) All accounts with sanctioned limits of Rs.2 lakh and below except those

covered in scoring models. b) All advances against security of Bank’s own deposits. c) All advances against Government securities including NSCs/KVPs/IVPs

etc. d) All loans against shares and debentures, units of mutual funds, life

insurance policies. e) All staff Loans. f) Advances to Central/State Govt. Departments. Undertaking/

Establishments, which are not running on commercial basis (e.g. Industrial/Agricultural/Rural Development Boards of various State Govts.). An organization may be treated as not running on commercial basis if the borrower is not required to draw Profit & Loss A/c (including income & expenditure and Balance sheet (statement of affairs) under the law.

g) Advances under Retail Banking Schemes, where scoring models are not available (gold & jewellery and PNB Baghban).

h) Bank’s scheme for finance to property owners against future lease rentals.

i) Loans to individuals, against mortgage of IPs where market value of IP is at least 150% of the loan amount, who are not engaged in any activity for which annual accounts are required to be prepared.

j) Advances to individuals under Agriculture (Direct), Agriculture (Indirect), Other Priority Sectors including Transporters, Artisan and Handicrafts.

k) Loans under LUCC and advances against warehouse receipts of CWC. l) Borrowers who are availing only those loans/limits where full powers

have been granted as per loaning power chart e.g. purchase of cheques drawn by Central & State Govts and drafts of public sector

banks, ILCs/FLCs where full cover is held by way of deposits till maturity, etc. # (Please refer note below)

m) Advances against clearing instruments/ bills/ clean overdrafts permitted within the vested loaning powers at various levels where the client is not availing any other loan/limit for which risk rating is applicable as per guidelines. # (Please refer note below)

n) Borrowers setting up new business where requirement of credit facilities is up to Rs.20 lakh.

 # The exemption from risk rating under (l) and (m) shall be subject to the condition that the loan/limit allowed is for a short period and is for a specific transaction. The exemption from rating should be exercised only in exceptional circumstances and wherever possible, credit risk rating in appropriate rating model be conducted. In case the borrower is availing any other limit, risk rating as per guidelines shall be applicable.  4. CREDIT DELIVERY

 X. STRENGTHENING OF PRE-SANCTION APPRAISAL To ensure the quality of loan portfolio, pre-sanction appraisal is given special attention. Over the years, Bank has developed useful credit appraisal methodology, which is constantly toned up in the light of the experience gained. Induction/intensive training on Credit Management and Risk Mitigation is provided to officers to bring improvement in the quality of appraisal.  As regards retail loans, the bank has been following the system of Score based lending for housing loan, car loan & personal loan schemes etc., which envisages assigning of scores to the prospective borrowers for the purpose of deciding their eligibility for these loans. This process is aimed at healthy growth of the Retail loan portfolio of the bank. Due diligence and market intelligence on borrowers/borrowing firms are important ingredients of Credit Management. Before sanction and disbursement of loan, visit of the unit, market report on borrowers and guarantors, besides other pre-sanction/pre-disbursement guidelines issued from time to time, should be a part of corporate culture. At the time of compilation/review of Confidential Reports (CRs) on borrowers/borrowing firms/co-obligants/guarantors, following points should be kept in view: 

It is imperative that the CRs should invariably be compiled/reviewed in terms of laid down guidelines.

At least two reports on each party should be obtained from sources uninfluenced by the party.

It should be noted that the name of the person with his position in the firm or the company must invariably be given while incorporating market reports in the CRs.

Reports should also be obtained preferably from all other banks with which the party has dealings. Such reports are however, usually very brief and drawn up in general terms and need to be amplified by enquiries from other reliable sources.

 I. Adoption of Fair Practice Code Based on the broad guidelines on the “Fair Practices Code for Lenders” advised by RBI, our bank has introduced Fair Practices Code in a bid to refine standard of customer services and transparency in the lending activities. The code contains various important declarations, which should be followed in letter and spirit. II. Valuation of Property And Plant & Machinery. 

x. Valuation of Property Based on RBI guidelines on valuation of property and empanelment of valuers, a comprehensive policy on valuation of property, plant & machinery, has been duly approved by the Board, which interalia, provides as under: 

a) Criteria for valuation in fresh loan accounts 

i) In borrowal accounts where aggregate credit limits are Rs.10 lakhs & above and value of immovable property to be mortgaged/charged is Rs.20 lakhs & above, branches shall get valuation of such IP done from the valuer on the Bank’s approved panel. ii) However, where the value of IPs to be mortgaged/charged is Rs.5 crore & above (as against existing guidelines of Rs.50 crore and above), branches shall get valuation of such IPs done from minimum two valuers on the Bank’s approved panel.

 b) Criteria for valuation in existing loan accounts

 Wherever the Incumbent feels that realisable value of IPs is significantly lower than the one on bank’s record in accounts with aggregate limits/outstanding of Rs.10 lakhs & above and value of immovable property mortgaged/charged to the bank is Rs.20 lakhs & above, he may get the property re-valued from the bank’s approved valuer provided the valuation is more than one year old. Further, periodicity for valuation from approved valuer would be once in 3 years and valuation in such accounts shall be got done from Bank’s approved valuer and fees payable to the valuer be recovered from borrower. However, where the value of IPs to be mortgaged/charged is Rs.5 crore & above (as against existing guidelines of Rs.50 crore and above), branches shall get valuation of such IPs done from minimum two valuers on the Bank’s approved panel.  - In all other cases including the above, valuation of

property shall also be done by the incumbents by

adopting one or more of the methods as mentioned in L&A circular No. 12 dated 05.02.2007.

 - In those cases also where there is significant variation

in the valuation reported by borrower and the one assessed by the Incumbent, the property shall be got valued from the valuer on the approved panel.

 - Further, in all cases if there is significant variation i.e.

25% & above in the realisable value of the property reported by the valuer and the one assessed by the incumbents, fresh valuation by another approved valuer of the Bank should be got done after consultation with the concerned Circle Head, which should be treated as final. However, where variation is below 25% i.e. one reported by the valuer and the other assessed by the incumbents, the lower of the two may be reckoned as value of the property.

 - Subsequent valuation should be assigned to the

empanelled valuer other than the valuer who has conducted the previous valuation.

 y. Valuation of Plant & Machinery

 i) In cases where new plant and machinery is to be

financed, the cost price indicated in the quotation/ supplier’s bill shall be reckoned as its value, which should be verified by making enquiries through other vendors supplying such machinery.

 ii) In fresh borrowal accounts where credit facility is to be

considered against the principal/collateral security of existing plant & machinery to be charged to the bank by way of hypothecation, mortgage, etc., valuation of such plant & machinery be got done by branches from the valuer on the Bank’s approved panel .

 iii) However, where the value of Plant & Machinery to be

charged is Rs.50 crore & above, branches shall get valuation of such P&M done from minimum two valuers on the Bank’s approved panel.

 III.METHODS OF LENDING 

i) Working Capital Following systems shall continue to be followed for assessment of working capital requirements of the borrowers: ii) Simplified method linked with turnover

 

Simplified method based on turnover for assessing working capital finance upto Rs.2 crore (upto Rs. 5 crore in case of SME units) shall continue. iii)MPBF System Existing MPBF system with flexible approach shall be followed for units requiring working capital finance exceeding the above-mentioned amount.

 iv) Cash Budget System Cash Budget System shall be followed in Sugar, Tea, Service Sector, construction activity, Film Production accounts etc. It will be our endeavour to introduce the same selectively in other areas also. v) Loan System for Delivery of Bank Credit Borrowers will have freedom to decide the proportion of Cash Credit and Loan Component of working capital limits, period of such loans and renewal/roll over of loan component. vi) Assessment of Non-fund based facilities Assessment of Non Fund based facilities shall be subjected to the same degree of appraisal, scrutiny as in the case of fund based limits because outstanding in these facilities are to be reckoned at 100% for exposure purposes. Therefore, need based requirement of a borrower should be assessed after reckoning the lead time, credit period available, source of supply, proximity of supplier, etc. in case of LCs and industry practices and business requirements in case of LGs. The working of NFB assessment is to be incorporated in the appraisal note. Further, while assessing non-fund facilities, cash flow aspects should also be taken into account. vii) Term Loan  The system of annual renewal/review of working capital limits is in vogue. In order to ensure effective monitoring specially in case of project financing having longer gestation period, a system of annual review of Term Loans has been introduced recently. Accordingly, all Term Loans, other than retail loans, with sanctioned limit of Rs.1 crore & above needs to be reviewed annually.  The annual review of term loans is to be carried out during implementation stage and also after implementation as per the prescribed format. After implementation period, it is necessary that the position of regular repayment is monitored by reviewing the achievement of production/sales vis-à-vis projections given for production/sales. Also, any diversification/expansion of the

company, which affects its debt serving capacity, needs to be reviewed.

 The review of Term Loans will have no bearing on asset classification and income recognition of the accounts. In case of infrastructure/mega projects, proper appraisal will be made by utilizing the services of specialized/Technical officers. The term loans with remaining maturity period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend, as is being done for ALM. All proposals for infrastructure projects shall continue to be sanctioned by GM & above at Head Office only except in case of following: 

i) Projects involving agro-processing and supply of inputs to agriculture shall be sanctioned by officials at various levels within their vested loaning powers.

ii) Proposals relating to construction for preservation and storage of processed agro products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality shall be sanctioned by CM/Circle Head & above within their vested loaning powers.

iii) Proposals for construction of educational institutions and hospitals for running the same by their promoters shall continue to be sanctioned by officials at various levels by exercising vested loaning powers. However, in case of construction of educational institutions and hospitals by companies/individuals engaged in construction or development of real estate projects shall continue to be sanctioned by Circle Heads & above.

 iv) Proposals relating to Water Supply Project, Irrigation

Project, Water Treatment System, Sanitation & Sewerage System or Solid Waste Management System, shall be considered at the level of Circle Heads & above within their vested loaning powers.

 v] Proposals for financing Windmill Power projects may

only be considered at the level of Circle Heads / DGM & above within their vested loaning powers.

 vi) Proposals relating to mini hydropower projects shall

also be considered at the level of Circle Heads & above within their vested loaning powers.

 viii) Policy for Debt Equity Ratio for Project Financing 

RBI has advised that banks in their own interest should have a clear policy duly approved by Board regarding Debt Equity Ratio (DER) and the infusion of equity/funds by promoters should be such that the stipulated level of DER is maintained at all times.  Keeping in view the spirit of RBI guidelines, Board has approved the desired level of DER for project financing under different industries and powers vested with various authorities to relax the same and a funding sequence so that the possibility of equity funding by the banks is obviated. The desired level of DER under Project Financing for various industries is advised vide L&A Circular No. 9 dated 15.01.2009. At present, MC has been vested with full powers to relax DER.  ix) Debt Service Coverage Ratio (DSCR) Debt Service Coverage Ratio provides a means of ability of an enterprise to service its debts i.e. “interest” and “principal repayment” besides indicating the margin of safety and is defined as under:

 Net Profit (After Taxes) + Annualinterest on long term debt +

Debt Service Coverage = Depreciation .

Ratio Annual interest on long term debt +

Amount of instalments of principalpayable during the year.

 The ratio of 1.5 to 2 is considered reasonable. The ratio may vary from industry to industry but has to be viewed with circumspection when it is less than 1.5.

 IV. LENDING ON THE BASIS OF PROJECTS APPRAISED BY OTHER INSTITUTIONS 

Many times TEV studies carried out for Project Lending by nationalized banks, appraising institutions, consultancy organizations and other institutions are received by the Bank. To have an uniform approach regarding vetting of projects appraised by such institutions, guidelines detailing the procedure to be followed, outsourcing of some part of Project Appraisal like due diligence, market potential studies, stage of business cycle, technology related inputs and cost components including the reports on equipment/raw material suppliers, comparative study of similar projects and preparation of financial models for the individual project and cut-off level for TEV Study have been framed. Besides all Nationalized Banks, names of appraising institutions, consultancy organizations and other institutions approved by the Bank from time to time are circulated to the field on an on-going basis.

 

V. ISSUANCE OF LETTERS OF UNDERTAKING FAVOURING OTHER BANKS/ FINANCIAL INSTITUTIONS (FIs)/LENDING AGENCIES/OUR OVERSEAS BRANCHES AND SUBSIDIARIES FOR THE LOANS EXTENDED BY THEM FOR TRADE CREDITS (BUYERS’ CREDIT)

 Branches authorized to deal in Foreign Exchange are permitted to issue Letter of Undertaking (LOU) in favour of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold) and up to three years for import of capital goods, subject to prudential guidelines issued by Reserve Bank of India from time to time. The period of such LOU has to be co-terminus with the period of credit, reckoned from the date of shipment.

 Since the Letters of Undertaking issued by the Authorized branches are a sort of Guarantee issued by them in favour of the lending institution on behalf of the importer customer, the same will be a part of the FLG limit of the customer.  Commission on issue of Letters of Undertaking is charged in terms of Foreign Exchange Circulars issued by International Banking Division, HO from time to time. Proposals for issuing guarantees favouring other banks/FIs/other lending agencies for the loans extended by the latter are considered at the level of MC/Board only. However, in order to tap the potential for issue of Letters of Undertaking, it has been decided that field functionaries of the rank of Scale V and above initially be permitted to issue Letters of Undertaking in favour of banks/FIs/other lending agencies as per loaning powers for guarantees vested with them.  Detailed guidelines on the subject have been circulated to the field.

 VI. The overseas branches of the Bank shall follow the guidelines contained in the respective policies duly approved by the Board for the respective centers. For issues which are not specifically covered in the respective policies, the provisions contained in the Bank’s policy shall apply. In the event of necessity of exception, CMD will have the powers for the same till overseas policies are amended. VII. For any external commercial borrowing (ECB)/other proposals, where disbursement has to be made through any of our overseas branches, the relevant term sheet containing pricing, tenure etc. shall be got vetted by IBD, HO before sanction.

 Y. POST-SANCTION FOLLOW UP 

a. Documentation– Vetting of Loan Documents 

Bank has in place a system of Vetting of Loan Documents from the approved advocate in case of borrowal accounts, with sanctioned

limits of Rs. 2 crore & above (both fund based and non-fund based). The system should be followed meticulously. b. Legal Compliance Certificate Under this system, for all credit limits of Rs.10 lakh & above, branches will submit legal compliance certificate, certifying the compliance of all the formalities contained therein. Pending formalities, if any, shall also be reported in terms of extant guidelines. The same is to be submitted in respect of all fresh sanctions/ enhancement/renewal, to the respective controlling office, within the stipulated time. c. Ensuring end-use of funds  As a matter of prudence, Bank needs to ensure end-use of funds it has lent. It is necessary to ensure that the Bank does not depend entirely on the end-use certificates issued by the Chartered Accountants but strengthens its internal controls and the Credit Risk Management System to ensure end-use of funds, which would enhance the quality of the loan portfolio. Some of the illustrative measures that could be taken by the branches to ensure end-use of funds are: 

i) Meaningful scrutiny of quarterly progress reports/operating statements, balance sheets of the borrowers;

ii) Regular inspection of borrowers’ assets charged to the Bank as security;

iii) Periodical scrutiny of borrowers’ books of accounts:;iv) Periodical visits to the assisted units;v) System of periodical stock audit, in case of working capital

finance; The appraising office, i.e. Branch Office/Retail Hub/CCPC, as the case may be, should conduct pre-sanction visit of borrower’s factory/business premises/IP offered as security in the loan account/borrower’s place of work/residence as part of appraisal and annex the copy of visit report with the proposal. The details of such visits is required to be reported in the Unit Inspection Register as prescribed in L&A Circular No. 158 dated 08.10.2008. Further, in order to minimise the instances of selling off of mortgaged IP/multiple mortgages, etc. a well defined system for periodic visit to the mortgaged sitehas been put in place to ensure that the security remains charged to the bank during the currency of the loan and guidelines in this regard have been cirulated vide L&A Circular No. 7 dated 09.01.2009.

 In order to ensure end-use of funds in case of the Short Term Loans sanctioned to the borrowers, who are not dealing with the bank, besides following the existing laid down guidelines, an undertaking be obtained from the borrowers prior to disbursement of loan that such loans shall not be used for diversion to capital market/unrelated activities. Such borrowers are also required to

confirm after disbursement that such loans have not been used for diversion to capital market/unrelated activities. d. Loan Review Mechanism  All standard credit risk rated accounts with exposure of Rs.10

crores and above for both individual and group accounts shall be subjected to credit audit. In case of accounts with combined group exposure of Rs.10 crores and above all the accounts irrespective of limits shall be subjected to credit audit.

Weak (‘C’ & ‘D’ risk rated) accounts which are already being monitored separately by the Bank with outstanding balance Rs.3 crores & above.

5% of accounts selected with exposure between Rs.5 crores and Rs.10 crores and outstanding balance of Rs.3 crores & above, on random basis, will be subject to credit audit. Such random selection of accounts will be made from those Circles where no loan account falls under purview of Credit Audit so as to improve and support the credit appraisal and management function of these Circles. The frequency of credit audit will be as under:

  In view of low risk contained in accounts with Risk Rating ‘AAA’,

‘AA’, ‘A’ credit audit of such accounts shall be conducted once in a year

‘B’ risk rated accounts showing moderate risk shall be subject to credit audit on half-yearly basis.

‘C’ & ‘D’ risk rated accounts with higher risk shall be subjected to credit audit on quarterly basis.

Credit audit of accounts of PSUs shall be done yearly (irrespective of risk rating).

 Credit audit exercise for eligible accounts will be conducted as under: Credit Audit by Concurrent Auditor

Credit Audit by CARD Auditor

Credit Audit of Standard a/cs with exposure from Rs.10 crores to Rs.20 crores (individual & group).

Credit Audit of Standard a/cs with exposure exceeding Rs.20 crores (individual & group).

Weak (‘C’ & ‘D’ risk rated) a/cs with outstanding balance between Rs.3 crores & Rs.8 crores

Weak (‘C’ & ‘D’ risk rated) a/cs with outstanding balance exceeding Rs.8 crores

 In the branches where Chartered Accountants have been appointed for concurrent audit, credit audit of eligible accounts shall be conducted by them.

 e. Preventive Monitoring System (PMS) Bank has introduced Preventive monitoring system for large borrowal accounts. The system is applicable to all borrowal

accounts having sanctioned limits (FB plus NFB) above Rs. 1 crore. The model for PMS has also been placed in central server environment. This system is a dynamic system for tracking the health and conduct of borrowal accounts to capture the signals of early warning. Timely decision should be taken on the future course of action in the borrowal accounts depending upon PMS rank.  f. Stock Audit

 Bank has a policy to conduct annual stock audit (including book debts) for all accounts with fund based working capital limits of Rs.5 crore and above whether standard or NPAs, which shall be followed by the branches. Further, in respect of borrowers enjoying fund based limits of less than Rs. 5 crore, the extant guidelines for getting the stock audit done in emergent cases and/or, wherever bank’s interest demands, with prior concurrence of Circle Heads shall continue. Annual Stock Audit should also be compulsorily conducted in all accounts with risk rating ‘B’ & below and enjoying fund based working capital limits of Rs. 1 crore and above.  In cases of Consortium/Multiple Financing where the borrower is enjoying working capital limits (fund based) of less than Rs. 5 crore from our Bank and Rs. 20 crore and above in aggregate from the banking system, branches should take up with lead bank/major share-holder banks in multiple banking arrangement for getting the stock audit conducted. The final decision regarding stock audit in the account shall, however, be based on the consensus amongst the member banks.  There may be certain prestigious accounts which may fall under the category ‘BB’ to ‘AAA’ under the risk rating module signifying lower risk and where conducting stock audit by an outside agency may hurt the sentiments of borrowers. Exemption from annual stock audit, if required, in such cases based on merits and business considerations of each case should invariably be incorporated at the time of fresh sanction/renewal/ review of the working capital limits. g. Recovery in Loans 

To maintain better quality of the loan portfolio, recovery of bank’s dues in time has a crucial importance in post-sanction monitoring process in the bank. At all levels, meticulous follow up needs to be continued to ensure that the recovery is made in all loan accounts in terms of sanction to ensure that no overdues remain outstanding in any loan account.

h. Monitoring of Weak and Irregular Accounts The bank has established systems for Inspection and control of its lending activity to ensure that loan accounts are conducted in terms of sanction so as to have a sound credit portfolio. These systems

have stood the test of time. The Pre-sanction appraisal, Post sanction monitoring process for corporate, retail and priority sector loans, Systems for Restructuring of weak borrowal accounts, Recovery process to be adopted for problem loans, Compromise policy for recovery of bank’s dues etc. are all well documented by way of Policy on Recovery of Loans & NPA Management as well as through various circulars issued from time to time.  CAD, HO monitors all weak and irregular loan accounts under standard category having outstanding of above Rs.10 lac on monthly basis. Besides, the position of all weak accounts under standard category with outstanding of above Rs. 10 lac having weaknesses such as units incurring operating/cash losses and accounts with ‘C’ & ‘D’ risk rating etc. is also monitored at corporate level on quarterly basis. At field level, monitoring of all such accounts is done as under:

 

 Upto Rs. 1 lac Incumbent Incharge of Small/Medium/

Large Branch/VLB Above Rs. 1 lac & upto Rs. 10 lac

Circle Heads/Incumbent of ELBs/ LCBs/MCBs

Above Rs.10 lac & upto Rs. 50 lac

Retail advances - GM(RBD)  Agriculture & SME - GM(PS&LB) and

GM(SME)  Others - GM Designate (Credit)

Above Rs. 50 lac ED/CMD i. Restructuring of Accounts/Corporate Debt Restructuring (CDR) The basic objective of restructuring is to put in place a transparent mechanism for restructuring of debts of potentially viable entities facing temporary problems due to factors beyond their control. In particular, the policy framework will aim at preserving viable units that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders by way of providing timely support through an orderly and coordinated restructuring programme. The bank has put in place policy for restructuring of debts in case of potentially viable entities. The different mechanisms available for restructuring of debt prior to framing the policy were as under. 

1. Corporate Debt Restructuring. 2. Rehabilitation scheme sanctioned under the aegis of BIFR.

 3. Restructuring under Debt Restructuring Mechanism for Small

and Medium Enterprises. CDR mechanism & DRM for SMEs are already in place for accounts having total exposure of more than Rs.10 crore financed under multiple/ consortium arrangement from the system and SMEs accounts respectively. It has been advised that these should be the preferred mechanisms for restructuring of debts in eligible accounts. However, need may arise for the bank to reschedule/restructure the accounts outside CDR/DRM for SMEs also due to various reasons such as time constraint, lack of consensus/ majority amongst the lenders etc., in which case restructuring may be considered within the framework of this policy. The restructuring policy shall be guiding light for restructuring of all types of loans other than accounts considered for restructuring under CDR and DRM for SMEs accounts. Identification of potentially viable accounts and monitoring them shall be an ongoing process. However, special focus needs to be given to the exercise of timely identification and restructuring of potentially viable entities. 

RBI vide its Circular dated 27.08.2008 and subsequent circulars issued from time to time has issued revised prudential guidelines on restructuring of advances thereby aligning the principles governing restructuring of different types of advances including those restructured under the purview of CDR. These RBI guidelines are applicable to all accounts restructured after 27.08.2008. Further, these guidelines and other measures announced by RBI in view of prevalent recessionary conditions necessitating restructuring of potentially viable entities facing temporary problems have been advised vide L&A Circular 152 dated 30.09.2008 and subsequent circulars issued from time to time.

 It is to be ensured that while taking up restructuring in any account, the ultimate viability/repaying capacity of the borrowers should be kept in view instead of considering temporary/ short term restructuring of the account. It assumes greater importance in the context that second time restructuring of any account will downgrade the account as regulatory concessions are not available in case of second/repeated restructuring. Further restructured loan accounts which have been classified as NPA should be upgraded to the standard category only after observing satisfactory performance of one year from the date when first payment of interest or instalment of principal falls due under the terms of restructuring package.

 B. Grading of Borrowers under the Rating system 

i. In order to provide a standard definition and benchmarks under the credit risk rating system, following matrix has been adopted in all the risk rating models.  

Rating category

Signification Description

PNB –AAA Minimum Risk Excellent business credit, superior asset quality, excellent debt capacity and coverage.

PNB-AA Marginal Risk Very good business credit, very good asset quality and liquidity, very good debt capacity and coverage.

PNB-A Modest Risk Good business credit, good asset quality and debt capacity & coverage.

PNB-BB Average Risk Average business credit with satisfactory asset quality and liquidity, good debt capacity and coverage.

PNB-B Marginally Acceptable Risk

Acceptable business credit with average risk, acceptable asset quality, modest debt capacity.

PNB-C High Risk Not creditworthy, generally acceptable asset quality.

PNB-D Caution Unacceptable business credit, normal repayment in jeopardy, inadequate projected net worth and paying capacity.

 

With a view to have better and wider differentiation among the borrowers within a rating categories of PNB-AA to PNB-B, a suffix of (-) is appended with the rating category for the borrowers in the first quartile and a suffix of (+) is appended with the rating category for the borrowers in the fourth quartile. We have further introduced three NPA ratings categories under Credit Risk rating system. As and when a rated account becomes NPA, the NPA ratings classifications need to be marked which will be treated as new ratings and again as and when there is change in Asset Classification of NPA account. Any subsequent up-gradation of the borrowal account to standard category would require fresh view on the rating of borrower. The NPA rating categories are as follows: Score Obtained Rating Grade DescriptionDefaulted Accounts(Accounts that have slipped to NPA category)

PNB-NS NPA - Sub-StandardPNB-ND NPA - Doubtful (I,II and

III)PNB-NL NPA - Loss

 In addition, the outcome of the Half Yearly Review (“Outlook Negative”/ “Outlook Stable” / “Outlook Positive”) of all eligible Large & Mid Corporate borrowers must be quoted by a suffix of the rating category. Ratings with AAA, AA, A, BB and B grades signify “Investment Grade” and C and D rating grades are called “High Risk Grade”.

 ii. Steps taken to strengthen the rating exercise: 

a) Certain hurdle points have been incorporated in credit risk rating models so that the borrowal accounts below a particular benchmark are subject to detailed specific risk analysis. Based upon certain hurdle points risk rating is downgraded. b) In order to stabilize and create robust credit risk management system, bank has been continuously monitoring the ratings and their migration. Notes on rating migrations are placed to CRMC for information.

 C. Reporting and Analysis of Credit Risk  The MIS in respect of risk rated accounts under all the models (based on the amount of the limits) is to be made available to the Risk Management Division. To ensure the quality and consistency of basic risk related data, the process of rating and vetting has been defined as under: 

LoanSanctioning Authority

Credit Risk Rating Authority Vetting/Confirming Authority

HO i) CRMD in consultation with branches

ii) Large Corporate Branches and

CGM/GM (RMD), HO

identified branches

 GM ( Field )/ Circle Office

ELBs/VLBs/branches.  The assistance of CRMD/ Functional Manager (Credit) of Circle Office may be taken in case of need.

DGM/AGM/CM (CRMD)

Branch Officer/Manager, Credit Section An official designated by the Incumbent not connected with processing/recommending of the concerned loan proposal.

 Rating of a borrower shall be undertaken at CCPC level itself by an officer who has not appraised the proposal and the same shall be vetted by an independent senior official of CRMD. Further, for the account not falling under purview of CCPC, a Credit Risk Cell (CRC) within CRMD shall be created where risk rating shall be carried out. These would also be subject to vetting by an independent Senior officer of CRMD. 

i) Rating/vetting at BOs in accounts with limits of Rs. 50 lacs and below: In such cases of accounts having aggregate sanctioned limits of Rs. 50 lacs and below in branches where there is no second officer available, the rating and vetting can be done by the same authority. However in such cases in order to ensure the quality of Credit risk rating, the same has to be submitted by the BO to the higher authority along with the limit-sanctioned statements regularly.  Data is collected by RMD, HO for: 

- Compilation of credit portfolio and its movement- Validity of various ratings- Migration analysis- Default probabilities- Validations of the risk rating models output.

 ii) Validity of Credit Risk Rating.  The credit risk rating of a borrower shall become due for updation after the expiry of 12 months from the month of confirmation of rating or 18 months from the date of balance sheet on the basis of which credit risk rating was assigned, which ever is earlier. The rating shall be treated as ‘overdue’ after the expiry of 15 months from the month of confirmation of rating or 21 months from the date of Balance Sheet on the basis of which the credit risk rating was assigned, whichever is earlier.  After the expiry of the above period, the rating should be stated as ‘Due’ or ‘Overdue’ for renewal as the case may be and word ‘Due for renewal’ or ‘Overdue for renewal’ will be suffixed along-with the rating wherever it is quoted.  

In case a borrower has extended the accounting period, the vetting authority may consider the extension of the validity of the earlier rating on the merit of each case. Fresh rating should be assigned to a borrowal account, irrespective of the validity period stated above, if any material development/information on the borrower comes to light, which may affect the rating adversely. In case rating is overdue for non-receipt of Balance Sheet, penal interest should be charged in such accounts as per extant guidelines.

 D. Portfolio Management The rated portfolio of the loan accounts should be monitored by RMD periodically to ensure proper mix of various risk category accounts and thereby the asset quality of the portfolio. With this aim the bank has taken the following measures: 

i) Evaluation of Rating wise distribution of borrowers in various industries is done to assess/appraise the quality of bank’s portfolio.

 ii) Industry scenario analysis is being undertaken taking into

consideration the changes in industrial and external environment e.g. changes in Economic/Fiscal/Monetary policies, general slowdown/ boom in the economy etc.

 iii) All limits are to be renewed/reviewed at least once in 12 months. In

order to have constant monitoring of the portfolio of the bank in the lower rating categories of “C” & “D” the bank has the system in place of having discriminatory time schedules for review of Credit limits in these categories of accounts. The review of such accounts is required to be done every 6 months.

 iv) The Bank has since appointed “Relationship Managers” in its Large

Corporate branches with the aim of proper monitoring of bank’s exposure in high value accounts so as to ensure constant surveillance on the substantial share of the loan portfolio of the bank which can alter its risk profile.

 E. Collateral Management Policy: Bank has already in place comprehensive Collateral Management Policy, duly approved by the Board (circulated vide RMD Circular No. 8 dated 01.02.2008). Apart from primary security, bank takes collateral security in borrowal accounts to mitigate the risk. Detailed guidelines on creation of valid charge, valuation and verification of various types of collateral security are issued from time to time.  F. Use of Guarantees as Risk Mitigants:  Appropriate acceptable guarantee is obtained as the risk mitigant in various borrowal accounts. The understanding of the field functionaries to use Guarantees as risk mitigant is also well established. Present, credit risk rating system evolved in the bank is aimed at measuring the Probability of Default

of the borrower. To measure the impact of Credit Risk Mitigants, bank has also implemented Facility Rating Model.

 3 OTHER ISSUES

i) Group Approach For identification of a group, the guiding principle is “Commonality of Management and Effective Control”.

 In case the accounts of any unit belonging to a Group become irregular and the concerned promoters do not co-operate with the Bank and Financial Institution to settle their dues, the Group will not be provided accommodation from the Bank. While dealing with cases involving extension of fresh facilities to such units belonging to a group, the under mentioned basic point shall be kept in view:- 

“Financial support for setting up of new ventures or expansion should not be extended to unit belonging to a group which is willful defaulter or non co-operative so as to ensure that no amount lent to a healthier unit of a group for its Working Capital requirements is transferred to another unit within the group by reducing the Current Ratio of transferor unit. For identification of cases of Promoter Groups/Companies for deterrent action, a coordinated approach be taken with Banks and Financial Institutions. Industrial Units in Public Sector are to be kept out of the purview of Group Approach.”

 ii) Consortium Arrangement In case of borrowers enjoying aggregate fund-based limits of Rs. 50 crore and above from more than one bank, consortium arrangement may preferably be considered. iii)Multiple Banking Arrangement Under Multiple Banking Arrangement each Bank is free to negotiate terms and conditions, including margin, rate of interest etc. Based on the communication received from IBA, the common code for financing under Multiple Banking Arrangement particularly in respect of sharing of information as well as common securities has been adopted by the bank.  iv) Syndication: In view of thrust of Government on infrastructure projects under Five Year Plan 2007-12 and Annual Budget 2008-09, there is a business opportunity for the banks towards part financing such projects by way of project appraisal and syndication, to augment bank’s fee based income. This may have an impact on overall economic activity whether manufacturing or retail sector. This will further add to our project appraisal and debt syndication assignments and generation of fee based income. The bank has already

initiated this business activity by way of setting up a separate cell, as a part of CAD, HO, which has now been stabilized. It will be bank’s endeavour that number of good assignments are generated towards project appraisal and loan syndication to increase fee based income (without any capital charge) and garner good funding business for the bank. Bank’s efforts would be to tap such business arising out of new/ expansion/ diversification projects coming up from our existing clientele as well as procuring fresh business by bringing the new customers within our fold.  v) Validity of Credit Limit Sanctioned Sanctions in respect of Working Capital and Term Loan facilities shall be valid for 6 months, from the date of sanction. Facilities not availed within the above period should be treated as lapsed and borrower be advised accordingly. Unless a lapsed sanction is revalidated by the competent authority within a maximum period of 12 months from the date of sanction, no facility should be released. Following powers will be applicable for re-validation of the sanctions:

 Sl.No.

Sanctions made by Competent authority to consider re-validation

Time period upto which revalidation can be considered from the date of sanction

1. Sanctions upto ED/CMD level

Sanctioning Authority

12 months

2. Sanctions made by MC CMD/ED 12 months However, to safeguard the bank’s interest, while permitting revalidation, the competent authority shall obtain and study the latest financials of the borrowers/units and also ensure that the projections submitted at the time of original sanction continue to hold good. vi) Selective Credit Control

 Based on the guidelines issued by RBI from time to time, credit limits will be sanctioned to borrowers dealing in sensitive commodities.  vii) Use of CIBIL data and RBI defaulters list With the aim of taking informed credit decisions, the bank has become a member of Credit Information Bureau of India, an institution set up for creation of the database in respect of the borrowers of banks/FIs and sharing the same with its member banks. Credit Information Report (CIR) should be drawn while considering fresh/enhanced/renewal proposal. This initiative helps the bank in better credit decisions thereby resulting in lower NPAs.In cases where name of a company appears in the RBI list of defaulters and the Director(s) of such company are also Director(s) in another company seeking credit facilities from our bank, such case should not normally be considered. However, sanctioning authority not below the level of Circle Head can take a view in this regard after conducting due diligence exercise. viii) New Business Group (NBG) 

The system of NBG has been revived at HO level to examine the large credit proposals in respect of new borrowers and take a view whether the same is support worthy or not. The purpose of setting up of NBG is to cut down the time period involved in making the credit decision and to consider the credit proposal in a structured format so as to reach a consensus about the proposal. The approval of NBG is only by way of expression and the complete appraisal is undertaken subsequently. As per the system, all fresh credit proposals envisaging total exposure (both fund based and non-fund based) of above Rs. 35 crore shall be placed before NBG in a structured format known as Preliminary Information Memorandum (PIM).  ix) Wilful Defaulters and Action against them Guidelines regarding wilful defaulters are now being issued by SAMD, HO. x) Exploring new avenues: In the changing scenario, where new innovative products are being increasingly used, to manage the various risks associated with the underlying assets such as concentration risk, market risk etc., it shall be endeavour of the bank to adopt new instruments such as derivatives /securitisation, based upon the market scenario as well as the ALM position after gaining experience.

 4. Environmental Issues The Bank shares concerns about environmental issues. Bank feels that besides creating awareness about pollution which is responsible for global warming there is a need for taking steps for reducing pollution by banking system as a whole.  As a step towards its concern about environmental issues, Bank has in place guidelines that before disbursement of Term Loan, it should be ensured that, wherever required, all necessary statutory and other approvals/permissions including from Pollution Control Board, have been obtained by the company.   Guidelines for treatment of carbon credits To stabilize emission of greenhouse gases in the atmosphere an international agreement between 141 countries, popularly known as ‘Kyoto Protocol’ was signed in the year 1997. The Kyoto Protocol permits meeting the national targets through a combination of domestic climate change activities and the use of the Kyoto Flexible Mechanisms. The use of these mechanisms has led to the emergence of a carbon trading market. India is one of the originators of Certified Emission Reductions (CERs i.e. carbon credits) and the major buyers are from European markets. Further, Multi Commodity Exchange of India Ltd. (MCX) and National Commodity & Derivatives Exchange Limited (NCDEX) have started future trading in carbon credit in India; thereby allowing carbon credit as a trading commodity. 

To tap the potential available under this area, bank has put in place comprehensive guidelines for financing Carbon Credit. However, the validity of Kyoto Protocol is up to 2012 only.Credit Restrictions on Financial Assistance to Industries Producing/ Consuming Ozone Depleting Substances (ODS): As advised by Government of India Ozone Depleting Substances (ODS) are required to be phased out as per schedule prescribed therein. The Protocol has identified the main ODS and set time limits on phasing out their production/consumption in future leading to a complete phase out eventually. Projects for phasing out ODS in India are eligible for grants from the Multilateral Fund. The sectors covered in the phase out programme are given below: 

Sector Type of Substance 1. Foam Products Chlorofluorocarbon – 11 (CFC-11) 2. Refrigerators and air conditioners CFC-12 3. Aerosol Products Mixtures of CFC 11 and CFC 12 4. Solvents in cleaning applications CFC-113, Carbon Tetrachloride,

Methyl Chloroform 5. Fire Extinguishers Halons – 1211, 1301, 2402 In view of the above obligations, RBI advised that finance should not be extended for setting up of new units consuming/producing ODS. Besides above, RBI has desired that banks should put in place a suitable and appropriate plan of action towards helping the cause of Sustainable Development with particular reference to IFC Principles on Project Finance (the Equator Principles), Bank is considering taking steps on this score. 5. Sanction of proposals beyond the purview of Credit Management & Risk Policy 

a. Policy prescriptions mentioned herein are subject to review / modifications by the competent authority(ies) as per the powers delegated to them depending upon the changing market conditions & business exigencies.  b. Management Committee may permit deviations beyond the purview of above policy. Management Committee may permit deviations beyond the purview of above policy. While permitting deviations from the policy guidelines, sufficient reasons for permitting such deviations need to be clearly outlined in the note for allowing such deviations. Such deviations considered expedient in the interest of the bank in the normal course of business must be reported by the respective Division/Department to the Board in its next meeting for information. c. Further, ED/CMD/MC may consider cases on merits in respect of the following matters in the larger interest of the bank, to the extent of their vested loaning powers:

i) Waivement of stock audit in case of accounts with credit risk rating ‘B & below’.

 ii) Relaxation in the ceiling of Rs.50 crore prescribed for single stock

broking entities including their allied concerns/inter-connected companies.

 iii) Sanction of short term/corporate loan for the purpose not specified

in the guidelines/policy. 

iv) Sanction of proposals of proprietary concerns/partnership firms, HUFs, Societies, Trusts beyond the exposure ceiling of Rs.30 crore/ Rs.75 crore/Rs.100 crore.

 v) Sanctioning loans beyond the prescribed internal ceiling in respect

of individual/group borrowers but within the ceiling prescribed by RBI.

 vi) Sanctioning loans beyond the maximum ceiling prescribed from

time to time under various schemes. To quote; Rs. 2 crores in case of bills discounting under Supply Chain Financing/Financing of CWC receipts backed by forward sale contract of NMCE, etc.

 vii) Amendments in the Restructuring Policy by CMD based upon

experience gained for smooth implementation thereof. 

viii) CMD may amend / modify the guidelines with regard to vesting of powers with Circle Heads pertaining to various issues on account of operational difficulties due to organizational restructuring.

 ix) ED/CMD may relax the prescribed margin in respect of advances

against bank’s deposits including DRI/FCNR (B) deposits as well as in case of advances against PSU Bonds/RBI Relief Bonds/postal securities/life insurance policies/liquid securities of similar nature on merits of each case.

 d. While summary of important policy guidelines have been discussed in this policy document, the relative operative guidelines/Manual/Book of Instructions for the concerned subject matter be referred to for details. 

6. The Credit Management & Risk Policy formulated for 2010-11 shall be valid till further review. 

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APPENDIX

 Industry-wise Credit Exposure Limits (as percentage to Total Advances (FB+NFB) of the Bank as on last Audited Quarter):

  

A. Industry / Sector Ceiling in %age for next 12 months or till review of limits

1.   All Engineering 6%2.   Cement & Cement Products 3%3.   Construction 5%4.   Food Processing 5%5.   Iron & Steel 10%6.   Mining 3%7.   Other Textiles 5%8.   Sugar 5%

B. Infrastructure1.   Power (incl. Electricity, SEBs) 10%2.   Roads 5%3.   Telecommunication 10%4.   Other Infrastructure 5%

  

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