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Manual of InstructionsVolume - 4

Chapter - II

Processing and Sanction of Credit Proposals

CONTENTS

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IntroductoryApplication FormsPreliminary scrutiny of applications receivedRegister of Credit Applications received and disposed ofIssuance of Acknowledgements to applicants.

AppraisalStudy of Application Forms and EnclosuresProperty StatementsIncome Tax / Sales Tax / Value Added Tax / Wealth Tax

Assessment OrdersFinancial StatementsStudy of the ApplicantInterviewing the applicantGathering of Credit InformationCredit Investigation

Assessment of Net WorthStudy of the Project /Activity

Pre-sanctions unit InspectionAppraisal Forms/ReportsAppraising Authority for various types of ProposalsAssessment of Credit NeedsSecurityCredit Rating of Borrowal AccountsCredit Exposure NormsSubmission of proposals to the sanctioning authorityDisposal of Credit Proposals - Time NormsDiscretionary PowersSanction of limitsValidity Period ofLimits

General Terms and Conditions applicable to large borrowalaccountsRevalidation of lapsed sanctionsCancellation/Curtailment of LimitsChange in Terms and Conditions ofSanctionSanction of Ad-hoc/Emergency Credit limits/Excess DrawalsOral or Telephonic Sanctions/PermissionsSanction Commitments (In principle sanctions)

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III

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Rejection of Credit ProposalsConsortium advancesMultiple BankingLine of CreditPhotographs of ApplicantsGeneral Aspects

Branch and Controlling Office Sanctions Reporting andReviewGuidelines for sanction of Loans and advances to CharitableTrusts

ANNEXURES

Register of Credit Applications Received and Disposed ofProforma of Acknowledgement for receipt of applicationpertaining to Weaker Section Advances.Proforma of Acknowledgement for receipt of application for

advance other than Weaker Section AdvanceCredit Information FormCredit Investigation ReportRating For SSI / Retail Trade / Small Business CategoryRating For Professional & Self Employed CategoryRating For RTO CategoryCredit Risk Assessment Of The Borrowal Account (Whereaudited Balance Sheet is available)Credit Rating System (CRS)Credit Rating Model For New Units Without Audited BalanceSheet (applicable for Rs.50.00 lacs & above accounts)Credit Rating Model For New Units Without Audited Balance

Sheet (Applicable for Rs.5.00 lacs & above but less thanRs.50.00 lacs)Explanatory Notes On Various Parameters In Industry &Management Risks For New Units Without Audited BalanceSheet Applicable For Both Credit Rating ModelsProforma of Communication of Sanction

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Volume-4 : Chapter-II

PROCESSING AND SANCTION OF CREDIT PROPOSALS

1. Introductory

1.1 Every application for a credit facility should be studied carefully to determine whether itsatisfies the broad parameters stated in Chapter-I "Advances General Guidelines" in thisvolume of the Manual of Instructions as well as to the Guidelines given in the CreditPolicy of the Bank. The guidelines regarding the study of the proposals and the details ofthe various steps involved in processing of credit proposals are dealt with in this chapter.

1.2 Guidelines relating to constitution, contractual capacity, borrowing capacity, restriction /prohibition on sanction of credit facilities, requirement of referring credit proposals toZonal Office/Higher Authority etc relating to each type of constituent are given in theChapter "Types of Constituents" of the Manual of Instructions. All such guidelines shouldbe observed while processing the credit proposal of a constituent.

1.3 As stated in the Credit Policy of the bank, the credit proposals received from HUF /TRUST applicants shall be referred to Credit Department, Head Office for AdministrativeClearance before sanction by respective sanctioning authorities.

Once administrative clearance is accorded by Head Office for sanction of credit facilities,for subsequent renewals and enhancements may be done by respective sanctioningauthorities within their delegated powers without further reference to Head Officeprovided there in no change in the composition or activity of the HUF/TRUST.

2. Application Forms

2.1 Standard application forms are available for various types of credit facilities, falling under

different categories of advances. Branches should ensure appropriate use of the formsby the applicants. For this purpose, branches may refer to the book-let on Loan

Applications and Process Notes as well as its soft copy made available to them.

2.2 As far as possible, all the credit facilities required by a party should be applied for at atime.

2.3 Filling up of columns in Application Forms

Applicants should be advised to exercise due care in filling the application forms as theinformation given therein forms the basis for taking the credit decision. The guidelines /instructions if any, given in the application forms should be carefully read and followed

by the applicants while filling the forms. Bank staff may provide necessary help /guidance to the applicants in filling the application forms.

2.4 The columns in the application forms should be filled in clear and unambiguous manner.No column in the application forms should be left blank. If any column is not applicablefor a specific case, the words 'Not Applicable' should be written. Any alterations /overwritings should be authenticated by the applicants with their full signatures.

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The columns indicated in the application forms need not necessarily be deemedexhaustive as the information required for credit decisions may vary from case to casedepending upon the nature of business/activity. If the given space in the applicationforms is not adequate, separate sheets may be attached after making a note of the factin the application form.

2.5 Depending upon the sanctioning authority under whose powers (i.e. Branch, ZonalOffice & Head Office) the application falls, suitable number of copies of the applicationand other enclosures should be obtained.

2.6 Every application form should be duly signed by the applicant and the co-obligant/guarantor (wherever applicable) in the space provided for in the form. Illiterate applicantsshould affix their left hand thumb impressions on the application forms along with theirphotographs invariably. Applications of constituents other than individuals should besigned by persons who are competent and authorized to borrow on behalf of theapplicant concerns.

2.7 Generally, the list of various enclosures to be submitted along with an application form is

given in the application form itself. Applicants should be advised to submit all therequired enclosures/information in one lot so as to minimise delays and avoidunproductive correspondence. Wherever a particular enclosure as indicated inapplication form is not enclosed, the reasons for the same be given.

2.8 Branch Managers/Controlling Authorities should avoid entertaining proposals sponsoredby middlemen/consultant firms.

3. Preliminary scrutiny of applications received

3.1 Immediately on receipt of an application, the date stamp of the branch should be affixedthereon. The officer handling credit / Manager Credit / Manager of the branch should

make a preliminary scrutiny of the application and ensure that

i) it is made on the appropriate form,

ii) it is duly filled in,

iii) it contains adequate information,

iv) it is duly signed by the applicant and co-obligant/guarantor, if any, and

v) it is accompanied by the required enclosures as applicable to the case.

3.2 When Application is incomplete/with Gaps:

If any deficiencies are found during the preliminary scrutiny, the application together withits enclosures should be returned to the concerned applicant under a writtencommunication stating the reasons for returning the application and the corrective actionto be taken by the applicant, in case he wants to resubmit the application. When theapplicant resubmits the application, the procedure given in the previous paragraphshould be followed once again.

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4. Register of Credit Applications received and disposed of

4.1 Applications, other than those for advances against Bank Deposits or Gold Ornaments,when they are received in full form, should be entered in the Register of Credit

Applications received and disposed of. The Register should be maintained in the formatgiven in Annexure No: I.

4.2 The serial number in the register should be given on yearly basis.

4.3 The serial number of the entry in the register should be noted on the relative application.

4.4 Depending upon the need, branches may enter applications received sector / category /scheme wise in separate folios of the register, duly giving a suitable prefix to the serialnumber.

4.5 Column Nos. 1 to 7 of the register should be filled in at the time of making the initialentry. The remaining columns of the register should be filled in subsequently at differentstages as per the progress of the application.

4.6 All entries made in the register should be verified and initialed by the concerned creditofficer of the branch.

4.7 Branch Manager should personally review the entries made in the list, at least once in aweek and enquire about inordinate delay, if any, in disposing of any application. Wherethere is inordinate delay, the reasons thereof and follow up action taken by the branchshould be noted against relative entry under the initials of the branch manager undercolumn number 18 and 20 respectively.

5. Issuance of Acknowledgements to applicants.

5.1 In respect of applications, which are complete and found to be in order, branches shouldissue acknowledgements to the concerned applicants as per the proforma given in

Annexures as stated below.

Annexure No: II Acknowledgement for receipt of applications pertaining to WeakerSection Advances.

Annexure No: III Acknowledgement for receipt of applications pertaining to OtherAdvances.

Time norms for disposal of Applications: Priority Sector Advances

Loans upto Rs. 25,000 FortnightLoans above Rs. 25,000 8-9 weeksFor MSME

Upto Rs.25,000 2 weeks

upto Rs. 5 lacs 4 weeks

5.2 The acknowledgements to applicants should be issued on the very day of receiving theapplications, after making entries of the same in the Register of Credit Applications

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Received and Disposed of. The serial number of the entry in the Register should bementioned against the column' serial number' in the acknowledgements. Care should betaken to ensure that the same serial number is also recorded on the main applicationform.

5.3 Issuance of acknowledgements may be waived in respect of applications for credit

facilities, for which spot-sanction can be given under discretionary powers of BranchManagers.

6. Appraisal

6.1 What is Appraisal

Appraisal is basically the process of evaluating the worth, merits and demerits,advantages and disadvantages of a credit proposal in the light of Bank's loan policy,lending norms, past experience, instructions and guidelines received from Head Office /higher authorities etc. Appraisal involves study of application and other forms, gatheringof credit information about the applicant and assessment of viability of the venture to be

financed.

6.2 Appraisal enables the Bank in knowing the desirability or otherwise of financing aproposition. Scientific appraisal of credit proposals helps the Bank in

i) ensuring judicious distribution of scarce credit,

ii) diffusing and minimising the credit risk,

iii) providing need based, purpose oriented and timely credit.

6.3 Broad guidelines for Appraisal

Though the degree and manner of appraisal of credit proposals vary from case to casedepending upon the category of the borrower, purpose of credit, quantum and nature ofcredit facility required etc., broad guidelines pertaining to appraisal of credit are given inthe following paragraphs. Apart from the guidelines in the following paragraphs,branches should also follow the guidelines given under Chapter Nos. 7 to 12 in the HandBook on Small Scale Industrial Advances to the extent such guidelines are relevant inindividual cases, apart from the loan policy guidelines issued by Head Office from time totime.

7. Study of Application Forms and Enclosures

7.1 Examining the data furnished

Normally the data furnished in an application and its enclosures forms the basis for thecredit decision to be taken. As such, a detailed and careful study of the application andits enclosures is considered to be the first and foremost important step in creditappraisal.

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7.2 Branches must ensure that an application for a credit facility conforms to the guidelinesgiven hereunder.

i) Appropriate format:

The application for a credit facility should be as per bank's standard formats

prescribed in the Booklet on Loan Applications and Process Notes. It mustbe accompanied by all the necessary enclosures required for taking a creditdecision.

ii) Name

An application received from an individual should contain his/her full name andsurname and father's/husband's name.

iii) Address:

Every application should contain full and correct business/official address as well

as residential address, with telephone and mobile numbers, if any, of theapplicant.

An application submitted by a Joint Hindu Family concern or a partnership firmshould contain the names and addresses of co-parceners/partners along with thebusiness address of the concern.

An application received from a limited company should invariably contain nameswith full and correct address of its registered office, Administrative office andFactory.

In case the applicant is having different establishments at different places, full

and correct addresses of all such establishments should be given in theapplication.

iv) Where an applicant for a credit facility is having sister/associate concern, thefollowing additional details should be given in the application.

a) Name and address of the concern.b) Date of establishmentc) Details of Investment maded) Line of Business/Activitye) Name and address of the bankersf) Details of credit facilities enjoyed, if any.

v) Where the applicant is having dealings with our bank or some other bank, natureof such dealings should be furnished in the application.

vi) In case the applicant is already enjoying credit facilities with some other bank/institution, complete details of the facility such as name and address of thefinancing bank/institution, nature of credit facilities, limit, details of securitiesoffered etc., should be given in the application. Copies of Inter-se Agreementamong the financing Banks should be obtained. Further, a 'No objection

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certificate obtained from the concerned financing Bank(s)/Institution(s) should besubmitted along with the application for credit facility.

vii) Co-obligants/Guarantors

Where the limits applied for are proposed to be secured by co-obligation /

guarantee of a third party, the application should contain the following detailsabout the co-obligant/guarantor:

a) Name and business / official as well as residential address of the co-obligant / guarantor.

b) Nature of business.

c) Nature of relationship between the applicant and the co-obligant /guarantor.

d) Name and address of the Banks and nature of credit facilities enjoyed, if

any.

e) Name and address of sister concern, if any, of the co-obligant/ guarantor.

Wherever, co-obligation/guarantee is stipulated in a sanction, a declarationshould be obtained from the borrowing concern as well as from the co-obligant /guarantor to the effect that "No consideration by way of commission, brokerage,fee or in any other form would be paid by the borrower or received by the co-obligant/guarantor directly or indirectly for standing as co-obligant/ guarantor."

viii) The information given in the application should be adequate, forthright andconsistent with the purpose of advance.

8. Property Statements

8.1 Property statements are basically meant for assessing the worth of the parties /individuals concerned.

8.2 In respect of all types of credit proposals, property statements of applicants as well asthose of co-obligants/guarantors should be obtained as per bank's standard proforma(Comp No. 40118). Obtention of property statements can, however, be waived in respectof advances against bank deposits and advances against gold ornaments.

8.3 In respect of credit facilities to Partnership firms/Joint Hindu Family concerns, property

statements of the individual partners/members should also be obtained.

8.4 Branches should obtain property statements of parties/individuals not only at the time oforiginal sanction of the facilities but also at the time of every renewal/enhancement ofthe limits.

8.5 All the columns in the Bank's standard proforma (Comp No.40118) of property statementshould be duly filled in. Every property statement should contain the bio-data and familyhistory of the party concerned, particulars of movable/immovable properties held by him,

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the income derived there from and the details of encumbrances, if any, thereon. Thestatement should contain information about all the properties belonging to the partiesirrespective of the fact whether such properties are offered to the bank as security or not.Where properties are held in joint names, particulars of share in the property and also inthe income should be furnished.

8.6 Every property statement should be signed by the concerned party and authenticated bya Village Officer/Revenue Official/Chartered Accountant under his seal with date.Documentary evidence, wherever available, in support of the properties described in thestatement to be obtained. Authentication of property statements may however, bewaived in the following cases.

i) Where properties are stated as NIL'.

ii) In the case of advances for small amounts and are of temporary nature againstGovernment Securities, Shares and Debentures, Insurance Policies, Postal/National Savings Certificates etc.

iii) In respect of parties from whom' Wealth Tax Assessment Orders' or certifiedcopies of Wealth Tax Returns have been obtained.

iv) In respect of renewal proposals where there is no change in the particulars ofproperty statements of the parties concerned.

8.7 Where there is unreasonable delay between the date of authentication of a propertystatement and the date of its submission to the Bank, the reasons for the delay shouldbe properly enquired into. Where found necessary, branches should call for latestproperty statements.

8.8 Obtention of Property Statement is essential as this would provide important details ofthe Individual borrowers and also the properties owned by him which are useful to theBank in case of any eventuality at a later date.

9. Income Tax/Sales Tax/Value Added Tax/Wealth Tax Assessment Orders

9.1 Tax assessment order provides authentic proof for the income/turnover/worth of theparties concerned. They also help the Bank in knowing the latest position in respect oftax dues of the parties concerned.

9.2 While considering credit limits for sanction, branches should invariably enquire whetherthe concerned parties (applicants/co-obligants/guarantors) are Income Tax / Sales Tax /VAT / Wealth Tax Assessees. In case the parties inform that they are not Income Tax /Sales Tax / VAT / Wealth Tax Assessees, a declaration to that effect should be obtained

and kept on record. In such cases, if the parties belong to professional or businesscategory, certificate of their income / turnover, duly attested by a Chartered Accountantshould also be obtained and kept on record.

9.3 Where the worth of a party to a credit facility is more than Rs. 15 lacs, the positionregarding wealth tax should invariably be stated in the credit application form.

9.4 Where a party to a credit facility is an Income Tax and/or Sales Tax/VAT and/or WealthTax assessee, copies of the latest Income Tax / Sales Tax / VAT / Wealth Tax

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assessment orders should be submitted to the bank along with the credit applicationform. In such cases, branches should also call for the original orders and the tax receiptsthereof for verification and return. The copies of the orders submitted should be verifiedwith the concerned originals and a remark to that effect should be incorporated on everycopy of the assessment order under the signature of the credit officer/Sub-Manager/Manager of the branch, with date.

9.5 At times, a party to a credit facility who is a tax assessee may express his inability toproduce copies of the latest tax assessment orders for want of completion of theassessment by the tax authorities. In all such cases, branches should obtain letters fromthe concerned parties together with copies of returns filed with the concerned taxauthorities. Documentary proof in evidence of payment of tax dues should also beobtained. The letters given by the parties in this regard, should interalia, contain,

i) reasons for non-submission of the tax assessment orders,

ii) a declaration to the effect that there are no arrears of tax dues, and

iii) an undertaking to produce original tax assessment orders as and when the tax

assessment is over.

The letters submitted by the parties as well as the copies of tax returns submitted bythem should bear authentication by a Chartered Accountant. Parties should be advisedto produce tax assessment orders as and when the tax assessment is over.

9.6 Where a party, who is a tax assessee as per rules, fails to produce a copy of the taxassessment order or return, branches should insist upon submission of a 'Tax ClearanceCertificate', issued by a competent authority.

9.7 Tax assessment orders/returns/certificates should be insisted upon not only at the timeof original sanction of limits, but also at the time of subsequent renewal/enhancement of

limits.

9.8 A declaration to be obtained from the borrower with regard to statutory dues.

10. Financial Statements

10.1 Financial Statements provide important information about the performance and financialsoundness of a concern over a period of time. They help in evaluating the creditworthiness and credit requirements of the concerned unit.

10.2 The two most important financial statements are Balance Sheet and Profit and LossAccount.

10.3 Balance Sheet:

i) A Balance Sheet is a statement of position of Assets and Liabilities on aparticular date. As per convention, the assets are shown on the right hand sideand the liabilities are shown on the left hand side. While liabilities constitutesource of funds, the assets evidence use of funds.

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ii) The Balance Sheets of limited companies should be prepared in the formatprescribed under the Indian Companies Act 1956.

10.4 Profit and Loss Account:

i) Profit and Loss Account is a statement of Income and Expenditure of a concern

during a specific period. While the income is shown on the right hand side, theexpenditure is shown on the left hand side. When the income is more than theexpenditure, the concern is said to have earned profit and when expenditure ismore than income, the concern is said to have incurred loss. The resultant profitor loss is transferred to the Balance Sheet.

ii) For the sake of convenience, a Profit and Loss Account may be divided into twoor three parts as given below.

a) Trading and Manufacturing Account showing Gross Profit.

b) Profit and Loss Account showing Net Profit.

c) Profit and Loss Appropriation Account showing appropriation of profittowards reserves, dividends etc., (Generally prepared in the case oflimited companies).

10.5 Balance Sheet and Profit and Loss Account are interdependent and always go together.While the Profit and Loss Account shows flow of funds during a specific period, theBalance Sheet gives position of funds, as at the end of the period. Finalising Profit andLoss Account is a must for preparation of a Balance Sheet.

10.6 Trading/Business/Industrial concerns prepare their balance Sheets and Profit and LossAccounts (hereinafter referred to as financial statements) at periodical intervals to

ascertain the results of the activities carried on by them and also for tax purposes.Normally, the financial statements are prepared once in a year.

10.7 Preparation of detailed financial statements on annual basis is statutory for limitedcompanies as per the Indian Companies Act. As per the Act, every company,incorporated under the Act, is required to place audited financial statements before itsshare holders in the Annual General Meeting.

10.8 As per the Indian Income Tax Act, every firm/company having an annual turnover/ grossreceipts exceeding Rs. 40 lacs and every professional having annual income exceedingRs.10 lacs should submit financial statements, duly audited by Chartered Accountants,to the Income Tax Department every year.

10.9 Branches should insist upon submission of audited financial statements from corporateclients who are as under.

The term 'Corporate Clients' include,

i) Public Sector Corporations and Companies.

ii) Private Sector Companies (including State managed companies).

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iii) Banks (including Co-operative Banks and Credit Societies).

iv) UTI, Insurance Corporation & Companies, PF Institutions etc.

v) Other Financial Institutions such as Industrial Finance Corporation of India, State

Financial Corporations and other similar corporations. (Also includes financialinstitutions in private sector such as investment companies and other companiesdealing in stocks, shares, bullion etc., The financial statements should be in thestatutorily prescribed formats).

10.10 Sometimes a private limited company, which does not need to print a Balance Sheet,may furnish a copy saying that there is only one original Balance Sheet. In such a case,branches should obtain a Photostat copy of the original Balance Sheet, certified as 'true'by the Chairman or Secretary of the company concerned. Where the concern seeks tosubmit its Balance Sheet without the auditor's certificate, production of auditorscertificate should be insisted upon.

10.11 In the case of corporate clientele, the financial statements submitted to the bank shouldalso be accompanied by the relative (i) Auditor's Report and (ii) Directors' Report, alongwith all Schedules. The financial statements submitted by such parties should becompared with the copies of those filed with the Registrar of Companies, so as toconfirm their genuineness and accuracy.

10.12 Where audited financial statements are submitted by a non-corporate applicant,branches should get separate confirmation of the financial statements from the auditor,who has prepared and audited the accounts of the applicant. The letter in this behalfshould be sent to the auditor under Regd. Post Ack. Due. The signature of the auditor onthe reply letter should tally with the signature on the financial statements.

10.13 In respect of credit limit upto Rs. 5 lacs, maintenance of books of accounts is difficult.However, for credit limits of above Rs. 5 lacs and below Rs. 10 lacs, books of accountsshall be maintained by the borrower without auditing when the turnover does not exceedRs. 40 lacs. In other cases i.e. in respect of credit limits of Rs. 10 lacs and above fromthe banking system, audit of accounts of the borrowers by chartered accountants wouldbe mandatory. Therefore, audited financial statements shall be insisted in respect ofcredit limits of Rs. 10 lacs and above from the banking system or where the annualturnover of the borrower exceeds Rs. 40 lacs per annum.

10.14 Where the limits applied for are proposed to be secured by guarantee of anotherbusiness concern, the financial statements of such guarantor concern should also beobtained along with the application form.

10.15 Where the applicant concern is having sister/associate concerns, the financialstatements of such sister/associate concerns should also be obtained along withapplication form.

10.16 Sometimes, the Balance Sheet submitted by a limited company relates to all the units ofthe company, i.e., a consolidated Balance Sheet, while the unit/division to be financedby the bank is only one of them. The Balance Sheet of the company, as a whole couldbe very different from that of the unit for which the bank is financing. It would, therefore,

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be necessary that in addition to the Balance Sheet of the company as a whole, separateBalance Sheet of the unit to be financed by the bank should also be enclosed to thecredit application form.

10.17 The financial statements submitted to the bank should be latest. Where the financialstatements are more than six months old, provisional statements indicating the latest

position/results should invariably be submitted. The financial statements submitted to thebank should be signed by the applicants stating that they are true and accuratestatements.

10.18 In the case of existing concerns, copies of financial statements for the last 3 years(including the latest one) should be submitted to the Bank, so that the performance ofthe concern over a period of time can be assessed.

10.19 Wherever audited financial statements are submitted, branches should carefully gothrough the concerned auditor's reports. Qualified financial statements, such as financialstatements bearing a remark by the auditors prepared as per the books placedbefore me should not be accepted.

10.20 While studying the financial statements, branches should assess the applicant's financialhealth in the following areas.

i) whether the applicant is financially sound,

ii) whether the applicant's earning capacity is good,

iii) whether the applicant's liquidity position is satisfactory.

iv) whether the applicant's business is well managed, and

v) how the applicant's business is financed till now?

10.21 As there is every possibility of a deceitful applicant trying to influence Bank's decision bypresenting manipulated financial statements giving out a rosy picture of his position,branches should be extremely careful while dealing with financial statements. No creditdecision should be made merely basing upon the financial statements presented by theapplicant.

10.22 Copies of the latest financial statements should be called for not only at the time oforiginal sanction of limits but also for subsequent renewals/enhancements/ review of thelimits.

10.23 Guidelines pertaining to study of financial statements are given in the chapter "Analysisof Financial Statements and Ratio Analysis" in the Hand Book on Small Scale Industrial

Advances. Branches should follow the given guidelines to the extent they are relevant inindividual cases while dealing with the financial statements.

11. Study of the Applicant

11.1 In the concept of appraisal, much reliance is placed on the credentials of the applicant. Itis not advisable to entertain any credit proposal unless branches are thoroughly satisfiedwith the capacity and integrity of the applicant concerned.

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11.2 The antecedents of the applicant to a credit proposal should be thoroughly enquired into.Where the applicant is not already known to the Bank, suitable introductory referenceshould be insisted upon and a confidential report on the applicant should be called forfrom the reference and the report be examined.

11.3 In respect of every credit proposal, branches should ensure that the,

i) applicant is of high integrity.

ii) applicants plans, of which the purpose of advance is an integral part, are soundand business-like and promise due repayment of the credit.

iii) applicant can be relied on to adhere to the plans discussed and not to divert thefacilities to a basically different purpose,

iv) applicant can be trusted not to misuse the facilities for an improper purpose likespeculative, extravagant or illegal activity etc.

v) applicant has the capacity and business ability to carry his affairs through to asuccessful conclusion, and that the

vi) applicant will not engage in any fraudulent / dishonest or speculative practiceswhich would inevitably undermine the safety of his position.

11.4 Application form and various other enclosures accompanying it will provide basicinformation about the applicant and his means. Adequate background knowledge aboutthe applicant can also be obtained through the following means.

i) Interviewing the applicant.

ii) Gathering of credit information through market enquiries and from other sources.

12. Interviewing the applicant

12.1 The interview with the applicant gives an excellent opportunity to the Bank to have firsthand information about the personal traits of the applicant, to verify his credentials andto cross check the veracity of the particulars given in the application and its enclosures.

As such, appraisal of every proposal should start with the interview of the applicantconcerned.

12.2 During the course of interview with the applicant, the following aspects should generallybe covered.

i) Family background of the applicant and occupations of his family members andrelatives.

ii) Details of the activity/project/venture/trade/purpose for which bank finance isrequired.

iii) Applicant's experience in the line of business.

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iv) Machinery, equipment, stocks etc., required and their purpose and utility. Detailsof suppliers and their standing.

v) Availability of technical know-how and infrastructure facilities existing andexpected.

vi) Operating cost.

vii) Licenses/permissions, if any, required to run the business.

viii) Details of premises If taken on lease, the terms and conditions of lease.

ix) General trend of the business as per applicant's version.

x) Profitability/pricing.

xi) Contacts/arrangements the applicant is having on hand, expecting to run thebusiness successfully.

xii) Adequacy of credit applied for.

xiii) Details of statutory dues, other borrowings.

xiv) Source(s) from which the applicant proposes to bring margin.

xv) Details of properties owned by the applicant and the details of the securitiesproposed to be offered.

12.3 While conducting an interview of the applicant(s), the under given guidelines also shouldbe followed by branches.

i) Before arranging the interview, the critical areas that require clarification/substantiation from the applicant should be identified so that the interview can bemeaningful and fruitful.

ii) The interview should preferably be in the place of business of the applicant.

iii) Interview should be conducted by the Credit Officer/Sub-Manager/Manager ofthe branch. Assistance of specialists like Technical Officers/Rural DevelopmentOfficers and Agricultural Clerks may be availed of, wherever necessary.

iv) The applicant should be made to feel at ease and comfortable. This is veryimportant since an anxious or disturbed mind cannot, in most cases, be rationaland it may lead to concealment of information involuntarily. The applicant shouldbe encouraged to talk more about what he wants to say. However, care shouldbe exercised to see that he does not drift away from the subject matter.

v) The Queries should be properly sequenced. Probing Questions, if asked in thefirst instance, are likely to keep the applicant on defensive resulting in gettingdistorted information. Hence, the interview should start with casual questions thatwill loosen all the defences in the applicant and bring him emotionally closer tothe interviewer.

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vi) The interviewer should start the interview without any preconceived notions andconduct it in an unbiased manner. He should listen to the applicant carefully andmake tactful enquiries, so as to get the required information without hurting thefeelings/ego of the applicant.

vii) The date, time and venue of the interview and the observations made by theinterviewing official should be duly recorded on a separate sheet of paper andthe same should be submitted to the appraising and sanctioning authorities forconsideration.

12.4 The information obtained during the course of interview should be cross checked withthe information furnished in the application and other enclosures. Independent marketenquiries should also be made wherever necessary, to verify the veracity of theinformation.

13. Gathering of Credit Information

13.1 Gathering of credit information comprises collection of information about the integrity,means and financial position of an applicant through various means and sources. Creditinformation enables the Bank in taking a prudent and judicious credit decision.

13.2 The need, degree and manner of gathering credit information varies from case to case,depending upon factors like category of the applicant, purpose of the credit, nature andextent of credit required, security offered etc. Branch Managers should carefully assessthe need in individual cases and determine the mode and extent of gatheringinformation. Normally, credit information from external sources should be gathered inrespect of all credit proposals barring advances against bank deposits, gold ornaments,and Govt., securities like NSCs, KVPs, etc.,

13.3 The credit information gathered should be properly recorded as per the prescribedformat. It must be analysed and should be suitably incorporated in the relative creditproposal for consideration of the sanctioning authority.

13.4 Credit information about an applicant can be gathered from the following sources.

i) Application form and its enclosures.

ii) Dealings, if any, of the applicant with the bank.

iii) Market enquiries.

iv) Status reports from other branches/banks.

v) Branch should verify the latest Defaulters Lists supplied by RBI,ECGC,CIBIL etc.,

vi) News papers, periodicals and other publications,

vii) Information exchanged among banks, financial institutions,

viii) Search/verification of public records.

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13.5 Application form as well as its enclosures such as property statements, Income Tax /Sales Tax / VAT / Wealth Tax Assessment Orders, Financial Statements etc., providevery valuable credit information about the applicant. The guidelines pertaining to study ofthese forms are already given separately in the earlier paragraphs.

13.6 Dealings of the applicant with the bank:

Where the applicant is a constituent of the bank, either presently or in the past, a resumeof his dealings with the bank will provide authentic and accurate information about hisintegrity and credit worthiness. Persistent irregularities in conduct of accounts, frequentbouncing of cheques, undue delay in retiring/realisation of bills, attachment/garnisheeorders received, failure to keep up promise in time, major irregularities pointed out byinternal inspectors/statutory auditors/RBI officials etc., are negative signals and warrantcaution.

13.7 Market Enquiries

i) Market enquiries provide first hand and latest information about the integrity,business reputation and financial position of a party. However, to guard againstgetting biased information, greatest care should be exercised in choosing thesources.

ii) Normally a minimum of two sources not connected with or related to theapplicant should be selected for obtaining the information. The sources soselected should themselves be of established repute having some knowledge /information about the applicant by virtue of their official/business position.

iii) The market enquiry about an applicant should cover the following aspects.

a) Constitution.

b) Extent and composition of movable and immovable properties.

c) Business practices.

d) Record of making payments and suppliers' observations thereon.

e) General credit and business standing.

f) Extent and nature of market borrowings.

g) Opinion about general business acumen and management of business

affairs such as cautious/overtrading/enterprising/litigious etc.

iv) The officer looking after advances should collect the information through marketenquiries and record the same in a separate register maintained forthe purpose.Full details of the applicant as well as the source from which information iscollected and the date of collecting the information should be noted in theregister. Separate folios in the register may be earmarked for entering detailsparty-wise. Apart from this, Sub-Manager/Manager of the branch should alsomake independent enquiries on their own, and record the same with full details in

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a separate register. At the time of considering a proposal for sanction, theinformation collected through market enquiries by the officer looking afteradvances and the Sub-Manager/Manager should be consolidated and comparedwith the information furnished by the applicant. Major discrepancies, if any,between these two should be probed into.

13.8 Status Reports from other Branches/Banks

i) Where the applicant for a credit facility is a constituent of some other branch ofour bank, a confidential report about the means, integrity and creditworthiness ofthe applicant should be called for from the concerned branch. The confidentialreport obtained in this regard, should, interalia, contain the following particulars:

a) Nature of account maintained, if any, with specific details such as mannerof operations, tendency to overdraw without prior arrangements, signs ofovertrading etc.

b) Broad lines of credit granted, if any, with particulars of security offered,

repayment, operating experience etc

c) Frequency and volume of Bill business handled with details ofexperience.

ii) Where an applicant for a credit facility is a constituent of some other bank, astatus report about the means, integrity and credit-worthiness of the applicantshould be called for from the concerned Bank. The guidelines on obtention andfurnishing of information given in Part-C "Secrecy of Customer Accounts" in theChapter-I of Volume-2 of the Manual of Instructions and in Banks Loan Policyguidelines issued from time to time on exchange of credit information on ourcustomers with other banks should be followed by branches in this regard.

13.9 Verification of RBI defaulters/CIBIL Defaulters/Caution/ECGC Caution lists

Dissemination of information by Credit Information Bureau of India Ltd., (CIBIL), ReserveBank of India (RBI) and Export Credit Guarantee Corporation (ECGC) are as under:

i) Dissemination of information in respect of suit filed category by CIBIL:

Credit Information Bureau (India) Ltd (CIBIL) was set up to serve as an effectivemechanism for exchange of information between Banks and Financial Institutionsfor curbing the growth of NPAs.

In respect of the Suit Filed Accounts category, information on Defaulters ofRs.1.00 crore and above and Willful Defaulters of Rs.25.00 lacs and above isbeing disseminated by CIBIL. The information is kept on Website of CIBIL atwww.cibil.com. The information is accessible to general public and any one canaccess the information through website. This information is made available freeof cost to all.

All the controlling offices / branches are therefore advised to access the websiteof CIBIL at www.cibil.com for Suit Filed Accounts category and verify whether

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the names of Borrowers, Partners/Directors of Borrowing Concerns; Associate /Group Concerns and Guarantors are figuring in Defaulters / Willful Defaulters listof Suit Filed Category disseminated by CIBIL.

ii) Dissemination of information by RBI

As per the provisions of Section 45-B of the Reserve Bank of India Act, 1934,Reserve Bank of India has been collecting and circulating to Banks and notifiedall India Financial Institutions, at periodical intervals, information in respect ofNon-Suit filed category of defaulting borrowers of Rs.1 crore and above(Doubtful and Loss accounts) and Willful Defaulters of Rs.25.00 lacs. Since theinformation on Suit Filed Accounts category is being disseminated by CIBIL,such accounts are not included in the defaulters lists circulated by RBI.

The Defaulters lists/willful defaulters lists received from RBI and ExportersCaution list received from ECGC in the form of Compact Discs (CDs) are beingcirculated periodically as and when received from RBI by CMRD, Head Office toZonal Offices, Exceptionally Large Branches, Very Large Branches, Large

Branches and all the branches where computer facilities are available to verifywhether the names of Borrowers, Partners/Directors of Borrowing Concerns;

Associate/Group Concerns and Guarantors appear/do not appear in Defaulters /Willful Defaulters list/ECGC (SAL) list of RBI and ECGC. Branches wherecomputer facilities are not available shall avail the facilities from the nearbybranches by obtaining a letter to this effect.

Caution Advices:

Reserve Bank of India is also sending caution advices and the same arecirculated to all controlling offices for exercising caution before granting/renewingany facilities to the parties mentioned in the caution advices.

iii) In view of the above, in respect of information on defaulters and willful defaulters,Branches and Controlling Offices are advised to verify the following lists.

a) Defaulters List of Rs. 1 crore and above (Non-suit filed category) of RBI.

b) Willful Defaulters List of Rs.25 lacs and above (Non-suit filed category) ofRBI.

c) Defaulters List of Rs. 1 crore and above (Suit filed category) of CIBIL(www.cibil.com)

d) Willful Defaulters List of Rs.25.00 lacs and above (Suit filed category) ofCIBIL. (www.cibil.com)

e) Caution List of RBI.

f) ECGC SAL List.

The appraisal at Controlling Offices and branches should include a clause to theeffect that the latest of above lists have been verified and the names of the

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constituent / connected promoters / accounts, other than nominee directors andprofessional directors, appear/do not appear in the lists.

If it is noticed that the names of the constituent/connected promoters/associatecompanies who approach the Bank for credit facilities and also the existingborrowers, appear in the defaulters list circulated by RBI/ECGC/CIBIL and if it is

informed by the borrower/prospective borrower that the borrowing companyconstituent/person is not the same and is/are not connected in any way to thecompanies mentioned in the defaulters list, branch is advised to verifyindependently and satisfy themselves and record the findings in the appraisal.

Branch should in such a case, obtain / verify

a) Written confirmation from the concerned lending bank or FinancialInstitution that the constituents referred to them are not their defaultersbefore sanction of credit facilities or recommending the proposal to HeadOffice.

b) The factual position from the copies of applications/forms filed regardingappointment of directors from the ROC, wherefrom full details regardingfull name, age, fathers name, address etc. obtained could be comparedwith RBI defaulters list and ensured that the names of the director(s)is/are two different persons under the same name.

If any borrower or their directors are found in defaulters list, we may finance /continue the existing finance/enhance duly justifying such financing and thereasons thereof for his/her name appearing in the defaulters list, assessing therequirements of the unit independently.

iv) DEFAULTERS LIST

In cases where any borrower / director / guarantor is appearing in RBIsdefaulters list, the competent authority for according administrative clearance forsanction / renewal / enhancement of limits by the sanctioning authority is asfollows:

Sanctioning Authority Competent authority for accordingadministrative clearance

Branch Manager DGM as ZonalManager and DGM/AGM as 2nd levelOfficial at ZO

GM (Cr.) at HO

GM (Cr.) or GM as Zonal Manager ED

ED CMD

CMD CMD

MC MC

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v) WILLFUL DEFAULTERS LIST:

As per RBI guidelines, in the case of wilful defaulters any fresh / renewal /enhancement of limits shall only be considered by board of directors. In view ofthe above, cases where any borrower / director/guarantor is appearing in WilfulDefaulters List, prior administrative clearance of the Board shall be obtained

before consideration of proposals for sanction/renewal/enhancement of loansand advances by various functionaries vested with delegated lending powers.

13.10 Newspapers, periodicals and other publications:

Newspapers, periodicals and publications such as Business Journals, Stock ExchangeDirectories provide latest and useful information, on aspects like change in constitution,change in financial position (like notices of insolvency, property transfer etc.,) pendinglitigation, prospects of the business etc. A reference to local newspapers, periodicalsand other publications will enable our branches to know about the creditworthiness ofthe parties and the prospects of the business/activity undertaken, by them.

13.11 CRIS-INFAC:

CRIS-INFAC Industry information service presents a detailed and comprehensiveanalysis of the current trends and the long-term performance outlook on 41 industries inIndia. It provides a detailed long-term forecast including the evolution of an industry, theregulatory, environment, cost structures, nature and extent of competition. It alsoprovides an analysis of the global trends along with statistical information on capacities,production, imports, exports, domestic and international prices, consumption patternsand provides the financial summary of the key players in the industry. The parametersare updated on Monthly basis. With a view to expand the usage of the Cris-Infacinformation the same is installed in the Banks Integrated Portal (Intranet) facility.Branches may login to the Portal and verify the information.

13.12 Information exchanged among Banks and other Financial Institutions:

Of late, Banks and other financial institutions have started exchanging of information onalleged irregularities, malpractices and misdemeanors, of Bank customers amongthemselves. Similarly, the system of circulating the list of defaulters among Banks, andother financial institutions is also in vogue in many places. Branches should carefullypreserve the information; communications received in this behalf and make a referenceto the information/communications, before extending credit facilities

13.13 Credit proposals received from 'Black Listed Parties', Economic offenders and partieswho are on the defaulters list of our bank or some other bank/financial institution should

not be entertained.

13.14 Search/Verification of Public Records and enquiries with Public Offices:

Search/verification of records maintained by offices such as Registrar of Companies,Registrar of Assurances and enquiries with 'public offices like Courts, Municipal andPanchayat Offices etc., will help branches in getting latest and authentic informationabout the applicants and also about their properties. Extracts from the public records /

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search reports, wherever obtained/prepared, should be submitted to the sanctioningauthority along with the proposal.

13.15 Gathering of credit information about a constituent should be a continuous process.Information about the means, integrity and creditworthiness of a constituent should begathered not only at the time of initial processing of the credit proposal but also

subsequent to sanction and disbursement of credit. Branch Managers and other officer /clerical staff connected with advances should keep themselves constantly in touch withthe market and other sources of credit information and gather information independently.

Any perceptible change in the means, integrity and credit worthiness of a borrower,which is likely to affect bank's interest adversely, calls for an immediate remedial actionfrom the branch.

14. Credit Investigation

Whenever credit proposals are to be considered, it is necessary to conduct a creditinvestigation before taking up such cases for evaluation. This process of preliminarystudy needs to be undertaken invariably before detailed evaluation.

14.1 Importance of Credit Investigation:

Credit Investigation and compilation of Credit Report, as a preliminary study, unfoldsvaluable information on integrity, honesty, reliability, creditworthiness, financial status,capacity, competence, experience, of prospective borrower, associate concerns andguarantors, Market reports, details of the project and performance of the industry etc.The reports serve as preliminary information about the prospective borrower.

14.2 Accounts for which Credit Investigation is to be conducted:

New advances of all borrowal accounts irrespective of the limit are subject to Credit

Investigation including proposals falling within the discretionary powers of Officer-inCharge of Personal Banking Center (PBC) / Trade Finance Center (TFC). However,

Agricultural advances, Government Sponsored Schemes and Weaker Section advancesupto a limit of Rs. 25 lacs are exempted from the purview of Credit Investigation.

Credit Investigation Reports shall accompany such proposals for the sanctions to bemade by branches and higher authorities at Zonal/Head Office level.

14.3 Purpose:

The Credit Investigation report shall serve as the basis for taking a decision forentertaining the proposal for detailed evaluation, appraisal and approval by the

sanctioning authority.

14.4 Areas of Credit Investigation:

i) Integrity of a borrower has no substitute. Before entering into any new creditrelationship, reasonable efforts shall be made to ensure that the bank is dealingwith an individual or organization of sound repute and creditworthiness. KnowYour Customer (KYC)" principle, is equally applicable to borrower customers.Through a proper credit investigation, the Bank shall screen and disassociate

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itself from individuals/organizations involved in unethical practices, fraudulentactivities and other crimes committed, if any. Bank credit shall not be extendedwithout understanding the customer or his business, or where Banks reputationmay get affected.

ii) Interview, discussion with the borrower shall be carried out to ascertain past track

record, activities presently undertaken, details of associate, sister, allied andgroup concerns. Details of project, infrastructure arrangements, forward andbackward linkages, availability of proper licenses from competent authorities,sources of margin, financial tie up with other banks, procurement of raw material,availability of power, labour and marketing arrangements etc. shall be ensured.The inputs so received through the process of discussion will help thesanctioning authority in taking a decision whether or not to take up the case forevaluation.

iii) Industry performance, present position of industry/activity, future prospects,demand and supply, major competitors, market share, proposed installedcapacity should be obtained. Sources of information may be from financial

magazines, cris-infac, Industry profiles etc. Number of units financed by bank,asset quality, industry exposure ceilings, credit ratings etc. shall be collected.

iv) Financial Statements of borrower, sister concerns shall be obtained andscrutinized. These statements/documents throw light on growth in sales,Profitability, cash accruals, tangible net worth position, investments in sisterconcerns, term liabilities, repayment obligations compared to cash generationetc.

The auditors notes to the financial statements shall reveal the accountingpractices followed by the business entity, details of contingent liabilitiesguarantee obligations, claims relating to Income Tax/Sales Tax/VAT/Excise Duty

/Custom Duty pending in the courts/tribunals. The information gathered as aboveshall enable the bank to get an idea on the business ethics adopted by theconstituent and take a decision whether or not to have dealings with theconstituent. Information on the associates also is to be obtained.

v) Quantitative and Qualitative aspects of verification i.e. evaluation of the worth,background, experience, honesty, integrity, character and capability of theborrower shall be ensured.

vi) Market Reputation: Enquiries shall be made about the applicant/associates withindustry associations, units in similar line of business / buyers / suppliers /competitors etc., are recorded.

In the case of existing accounts information shall be kept updated on theconstituent through reports appearing in the local press/ news papers/businessmagazines/contacts with government officials/businessmen/banker-colleagues /credit rating agencies

Incase of small borrowers, it shall be ensured that the individual resides /undertakes activity within the command area of the branch and his address shallbe got confirmed. Further discreet enquiries shall be made with nearby residents

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/ businessmen/banker-colleagues on the standing and credit worthiness of theborrower.

vii) Confidential report with the existing bankers shall be obtained with full details ofcredit facilities sanctioned, conduct of the accounts and submission of data /information etc. Reports from Credit Information Bureau of India Ltd. shall be

obtained on the credit facilities enjoyed by the constituents as well as the statusof the accounts, when it becomes fully operationalized.

viii) Pre-sanction unit inspection shall be conducted and is to be reported in theprescribed proforma.

ix) Verification of RBI defaulters list, willful defaulters list, ECGC-SAL list and cautionlist in respect of borrowing entity, associates and co-obligants/guarantors.

After undertaking credit investigation and collecting information from varioussources as explained above a due diligence report shall be prepared coveringaspects like Character, Capacity and Credit-worthiness of the constituent and

shall be reported in the formats prescribed as under.

14.5 Credit Investigation Formats:

i) Credit Information Form to be obtained from prospective borrower in the formatgiven as Annexure No IV.

ii) Credit Investigation Report to be submitted by Credit Investigation Officer in theformat given as Annexure No. V.

14.6 Reporting:

Credit Investigation Officers shall submit Credit Investigation Reports directly to ZonalOffice/Branch. Controlling Offices and branches are also advised to ensure that all theprocess notes shall invariably record the findings of Credit Investigation and a copy ofthe Credit Investigation Report shall be submitted by the sanctioning authority to thereviewing authority for review along with the process note.

Credit Investigation shall be conducted by the Credit Investigation Officers designatedfor the purposes. In case of branches, where the services are not made available tobranches by Zonal Office, the branch manager/Officers in-charge of Personal BankingCenters / Trade Finance Centers himself shall undertake Credit Investigation andprepare Credit Investigation Report. Wherever the Sanctioning Authority is different fromCredit Investigation Officer, Sanctioning Authority shall invariably record his remarks on

the findings of the credit investigation officer in the credit investigation report.

In respect of all the new proposals falling under the powers of Head Office, CreditInvestigation Report shall invariably contain the remarks of the Zonal Manager on thefindings of the Credit Investigation Officer/Branch Manager so as to serve as a tool fortaking a decision by the Sanctioning Authority at Head Office.

Time Norms prescribed for disposal of the proposals shall be ensured and under nocircumstances the proposal shall be delayed for the sake of Credit Investigation.

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15. Assessment of Net Worth

15.1 'Worth' indicates the capacity of the party to bring in the required capital/margin. It alsoindicates the cover available to the Bank by way of personal security in the case offailure of the business venture/activity.

15.2 In respect of all credit proposals, the worth of the applicant and the co-obligant/guarantor must be assessed and clearly noted in the relative appraisal form/report.

15.3 In the case of parties filing wealth tax returns, the assessment of worth should be basedon the latest wealth tax returns (year of assessment to be specified).

15.4 In the case of parties, who have not submitted wealth tax returns, assessment of worthshould be based on the information furnished in the property statements, financialstatements, Income Tax Returns, etc. In such cases, discreet market enquiries shouldbe made to verify the accuracy and authenticity of the information furnished in thestatements before assessing the worth of the parties.

15.5 The basis on which the worth of a party is assessed should be indicated in the relativeappraisal form/report.

15.6 Methodology of computing networth:

The following methodology should be adopted for the purpose of assessing net worth ofthe parties in the context of bank lending.

i) Individuals and Sole Proprietary Concerns:

a) Moveable Assets

b) Personal unencumbered immoveable properties:

Self acquired properties

The share in the ancestral properties acquiredon division of the Joint Hindu Family as per theHindu Succession Act/Indian Succession Act

c) Capital Investment in the business includinginvestment in partnership:

Total Worth of the party

Deduct: -- Existing borrowings, if any.

Net Worth of the party

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ii) Partnership Firms/Joint Hindu Family Concerns:

Add: a) Capital (from the Balance Sheet) investedin the business

b) Undivided profits, if any

Deduct:

a) Accumulated losses, if anyb) Drawings by the partners /members, if anyc) Investment in subsidiary firms, if any.

Net Worth of the Firm/JHF Concern

iii) Limited liability Companies and other Body Corporates

Add: a) Paid-up Capitalb) Free Reserves

(including balance in share premium account, capitaland debenture redemption reserves and any otherreserves not being one created for repayment of anyfuture liability or for depreciation in assets or for baddebts or a reserve created by revaluation of theassets)

Deduct:

Accumulated balance of loss, balance of deferredrevenue expenditure as also other intangible assets.Investment in subsidiary and branch companies andloans/advances due from subsidiary companies /affiliates other than those of trading nature.

Net Worth:

iv) Other Entities

a) Owned Funds (Capital + Free Reserves+ Accumulated

profits)

Less:

b) Accumulated Lossesc) Intangible Assets Investments in/advances due from

sister/associate/allied concerns or branch offices.

Net Worth

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15.7 The under given guidelines should be followed while assessing worth of parties:

i) Any property standing in the name of a party jointly with others may be generallydisregarded. Similarly, undivided share in Joint Hindu Family properties shouldbe ignored for the purpose of computing individual worth of the parties.

ii) The value of properties representing minor's share therein and properties underdispute should be excluded.

iii) Self acquired properties of members of Joint Hindu Family should not be takeninto account for assessing the worth of a Joint Hindu Family Firm.

iv) Properties of Joint Hindu Families are sometimes held in the individual names ofmembers, in which case branches should satisfy themselves after makingnecessary enquiries that the properties in question are in fact ancestral familyproperties, before taking them into account for arriving at the net means of theJoint Hindu Family firm. In such cases, a suitable declaration should also be

obtained from the concerned members stating that the properties (to bedescribed in the letter) standing in their names and included in the assets of theJoint Hindu Family firm are the absolute properties of the Joint Hindu Family ofwhich they are members and that such properties are held by them on behalf ofand for the benefit of the firm.

v) It should be noted that in the prosecution of their enquiries branches mustexercise tact and discretion compatible to the end view and must avoid irritatingwell known constituents of good standing by calling for inquisitorial details.

16. Study of the Project /Activity

16.1 In the context of purpose oriented and need based lending the study of the project/activity proposed to be financed need not be over - emphasized.

16.2 Banks standard application forms meant for sanction of credit to small borrowersnormally contain provision for incorporating required data about the project/activityproposed to be financed. Where the Bank's standard application forms do not containspecific provision for incorporation of the data or where the application/appraisal formsstipulate submission of separate Project Report/Economics of working, the same shouldinvariably be obtained from the concerned applicants along with the application forms.

16.3 A 'Project Report' is a document prepared by the entrepreneur or his consultant coveringtechno economic details of the project. It should provide all the information such as

location, land and building, details of machinery and services, infrastructure facilities,raw materials, production capacity, projected cost of production, profitability and balancesheet estimates, cash flow/funds flow for repayment period of the term loan, licence /clearance from government agencies, capacity/competence of the promoters, keypersonnel etc.

16.4 In the case of term loan proposals, the regular repayment of instalments depends uponthe continued profitability of the concern. Though fixed assets and, other properties aresecured to the bank, resort to such securities is not desirable in an ongoing concern.

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Also in the event of forced sale, such security may not always bring adequate funds torepay the bank's debt. Much reliance cannot, therefore, be placed on the security offixed assets. The continued viability of the project should be the main cardinal principle.

16.5 While in the case of existing units, a good deal of data concerning the past performanceis available, Bank has to depend on projections in the case of units which are started

afresh. As there is every possibility of the project estimates and forecasts not comingtrue due to margin of error branches must be extremely careful while dealing withestimates / projections submitted by the applicant by subjecting the proposal toSensitivity analysis in case of high ticket advances. Branches should, in the firstinstance, satisfy themselves about the reasonableness of the estimates/projections,before proceeding further in the matter.

16.6 In respect of agricultural credit and other advances to small borrowers, necessaryguidance/assistance may be extended to the applicants for preparation of the projectreports/economics of working.

16.7 Every proposal should be studied carefully in the light of the (i) information submitted by

the party, (ii) the information collected/gathered by the Bank and (iii) the knowledge /experience gained by the Bank in financing the same or similar activities. The services ofthe specialist staff such as Rural Development Officers and Technical Officers may beavailed of wherever necessary.

16.8 In respect of proposals pertaining to productive/commercial ventures. The followingfeasibility studies should be conducted to ascertain whether the proposals are bankableor not.

i) Technical Feasibility:

There should be a reasonable certainty that the applicant will be able to achieve

what he wants to achieve through bank finance. This depends upon location ofthe unit, the availability of suitable men, Machinery and material, the technologyadopted and the availability of other infrastructure facilities. Assumptions made, ifany, should be realistic but not idealistic.

ii) Commercial Viability:

The earning capacity of a unit primarily depends upon its sales. The applicantcan honour his commitments only when he is able to sell what he has produced.Commercial viability studies involve study of the market for the goods/servicesproduced by the applicant. The pattern for supply and demand for the product,the prospects for future demand. Consumer preference, impact of expansion of

existing units, possibility for new technological innovations are some of theaspects to be examined in this regard.

iii) Financial Feasibility:

The financial feasibility will depend upon whether,

a) estimated cost of the project/activity is reasonable.

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b) the financial arrangements are adequate and make possible theavailability of cash when needed.

c) the income and cost estimates are realistic, and

d) the borrower's repaying capacity, can fairly be depended upon.

e) the basis of arriving at the estimated projections in sales and assumptionsshould be clearly spelt out.

iv) Managerial Ability:

Managerial competence is the touchstone for any venture. The person(s) behindthe enterprise, their integrity, drive, business acumen, technical and commercialcompetence are very important. Branches should carefully examine the manage-rial ability of the applicants and suitability of the venture to them in the light oftheir age, qualification and experience.

16.9 Apart from making the feasibility studies, branches should also ensure that the project /activity proposed to be financed complies with the guidelines/instructions issued byHead Office and the refinancing agency, if any.

16.10 In the context of feasibility and viability studies, branches should follow the guidelinesgiven in the "Handbook on Small Scale Industrial Advances" to the extent suchguidelines are relevant to the individual cases.

16.11 While appraising credit proposals, factors such as geographical areas of operations ofthe constituents, competition in the industry, market share of the borrower, likelycompetition and industrial scenario that may arise in near future shall be taken intoaccount and SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is to be

done to mitigate the perceived threats/risks.

17. Pre-sanctions unit Inspection

Pre sanction unit inspection not only gives the first hand knowledge about the working ofthe venture but also enables the bank to verify the correctness of the informationsubmitted by the applicant. Pre-sanction unit inspection is one of the means ofassessing the credit worthiness of a prospective borrower and credit risk involved in theproposal. In case of existing borrowers, the unit inspection before considering renewal/enhancements of credit facilities serves as a means to ensure that the affairs of theborrower are being run on expected lines and there is no material change in the status ofthe borrower. Several adverse features like poor industrial relations, interrupted

production, poor maintenance of Plant and Machinery come to light during unitinspection. During the course of pre-sanction unitinspection, aspects such as locationaladvantages of units, availability of infrastructure and marketing facilities, licenses /permissions etc., should be examined. The correctness of the address furnished by theapplicant and co-obligant/guarantor may also be verified during pre-sanction unitinspections. The observations during pre sanction unit inspections should be properlyrecorded and submitted to the sanctioning authority along with the relative creditproposal. The following guidelines shall be ensured:

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i) All the credit proposals falling under HO powers either for fresh/renewal/orenhancement, shall be sent to Head Office accompanied by unit inspectionreports;

ii) All credit proposals falling in Zonal Office powers either for fresh or for renewal/enhancement, shall be accompanied by unit inspection reports; and

iii) Branches shall ensure that credit facilities, fresh/renewal/enhancement, shall besanctioned only after conducting pre-sanction unit inspection.

Branch Manager/Sub-Manager/Credit Officer should conduct pre-sanction unitinspection of the unit after going through the data made available by the applicant butbefore submitting a proposal to the sanctioning authority.

18. Appraisal Forms/Reports

18.1 On the basis of the reports and statements received and the independent enquiriesmade, branches should decide whether the applicant deserves the credit facility sought

for and whether the proposal conforms to canons of sound lending and bankingprinciples. In case the proposition is sound on its merits, an appraisal report should beprepared.

18.2 Branches should exercise extreme care in preparing the appraisal form/report since thedecision of the sanctioning authority is normally based on the information furnished inthe appraisal form/report. Every effort should be made to ensure that the informationfurnished in the appraisal form/report is authentic, accurate, adequate and gives a truepicture of the borrower and the activity proposed to be financed. The strong as well asweak points of the proposal should be duly highlighted so that a judicious decision canbe taken by the sanctioning authority.

18.3 Standard appraisal forms are available fordifferent categories of advances which arebrought in the shape of a book-let and compact disc form. The sanctioning authorityshould use the same format for appraisal. The standard appraisal forms containexhaustive information about the borrower and the activity. Branches should fill up theforms in accordance with the guidelines given therein and submit the same together withthe required enclosures to the sanctioning authority for consideration. However branch/controlling office/Head Office may add any other information which they feel is relevantfor taking a decision on the proposal. It is the responsibility of the officer originating theprocessing note to fill up all the columns. All the columns in the appraisal shouldinvariably be filled up without any omission. No existing column in the prescribed formatshould be omitted even if the system is mechanized. Where information against aparticular column is nil/not applicable/not available, the same shall be noted against it.

No column can be left blank without noting information against it. The overallresponsibility will however rest with the branch manager.

18.4 In respect of proposals for which standard appraisal forms are not available, theconcerned application forms are having provision for appraisal report. Branches whiledealing with such proposals should fill in the relative reports before submitting the sameto the sanctioning authority for consideration.

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18.5 Appraisal forms/reports should be prepared in all cases whether sanction of limitscovered therein falls under the discretionary powers of the Branch Manager or of ahigher authority.

18.6 While preparing the appraisal forms, branches should follow the guidelines givenhereunder:

i) Every appraisal form should contain the relative application number on the top inthe first page.

ii) Depending upon the case, the words 'New Proposal', 'Renewal Proposal'.'Enhancement Proposal' etc., should be prominently noted on the top of theappraisal form; In case of renewals, the due date of the renewal, date on whichthe proposal is received at the branch and the date on which clarificationsreceived thereon should also be noted.

iii) Full names, addresses and worth of the applicant/s, co-obligants and guarantor/sand the nature of relationship, if any, among them should be duly furnished in the

appraisal form.

iv) Every appraisal form should contain brief but precise particulars of the line ofactivity/business of the applicant. Specific information, instead of generalisedinformation, should be furnished where the applicant is engaged In different linesof activities/business particulars of all such activities/business/should be giveneven if the credit limit applied for relates to one or some of the lines of activities/business.

v) Brief but precise particulars of the purpose of advance should be given in theappraisal form. Vague information like 'for business', 'for expansion' should beavoided.

vi) Precise description of the security offered together with particulars such asownership, location, value, charge proposed to be created in Bank's favour,whether first charge, second charge, pari-passu charge etc., should be given inthe appraisal form. In case the security offered is already under charge to theBank in connection with some other facilities, full details of all such facilitiestogether with the latest liabilities there under should be furnished.

vii) All direct and indirect liabilities (as partners, Co-parceners, co-obligants.guarantors) of the applicant and the co-obligant/guarantor to the Bank as on thedate of proposal, should be furnished in the proposal form. Where the applicantand the co-obligant/guarantor is having sister/associate concerns, the nature ofdealings, if any, between the Bank and such sister/associate concern should also

be furnished.

viii) Appraisal form should also contain nature and quantum of facilities applied forand recommended. In case of renewal with or without enhancements, brancheshave to invariably incorporate the irregularities pointed out in the inspectionreports internal/external and the rectification thereof.

ix) The appraisal forms may be prepared by the officer looking after advances underthe guidance / supervision of the Sub-Manager/Manager of the branch.

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x) In case of branches, (other than branches manned by only one officer includingthe Branch Manager), the appraisal should be put up by the officer other than thesanctioning authority. In case of exigency, when the appraisal and sanction isdone by the Branch Manager himself, then such sanction should be specificallybrought to the notice of the reviewing authority with reason. For this purpose, the

remarks column in the reporting format shall be utilised. The controlling authorityshall review such exigencies and strengthen the credit management at thebranch. In case of branches manned by only one officer including BranchManager, appraisal and sanction shall be done by the Branch Manager.

xi) Advances with deposit potential:

Quality of assessment of proposal should not be diluted under any circumstanceseven if supported with deposit potential and the assessment should beindependent of any deposit support. Proper justification for sanctioning of anyloan/enhancement should be duly incorporated in the appraisal note.

19. Appraising Authority for various types of Proposals

Proposals fallingwithin the powers

of

Who has to appraise and to whom tosubmit

No. of copies ofproposal forms

requiredi) Branch Manager Small Branch:

In case of branches manned by only oneofficer including Branch Manager, appraisaland sanction shall be done by the BranchManager.

Medium and Large Branches:

Branch should allot the handling of credit toone of the officers while making allocationand rotation of duties. The name of suchofficer with dates from & to should berecorded in Rotation of duties Register.

Officer handling credit has to appraise theproposal and submit the same with hisspecific recommendations to the BranchManager. In case of exigency, when the

appraisal and sanction is done by theBranch Manager himself, then suchsanction should be specifically brought tothe notice of the reviewing authority withreason. For this purpose, the remarkscolumn in the reporting format shall beutilised. The controlling authority shallreview such exigencies and strengthen thecredit management at the branch.

Single Copy

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Very Larqe Branches & ExceptionallyLarge Branches:

Manager (Credit) has to appraise theproposal and submit the same with his

specific recommendations to the ChiefManager / Executive heading the Branch.The officer handling credit of the branch,where there is Manager (Credit), shall,apart from work allotted from time to time,attend to the function of handling creditincluding preparation of process notes apartfrom obtention of appropriate applicationform duly filled up in all respects along withrelevant enclosures.

ii) Zonal Office A t Branch Level:

Manager / Chief Manager / Executiveheading the Branch has to appraise theproposal with the help of the Officerhandling credit / Manager (Credit) andsubmit the same with his specificrecommendations to the Zonal Office.

At Zonal Office Level:

Concerned Officer handling credit /Manager

(Sr. Manager Credit) would go into all thedetails and put-up a note to the sanctioningauthority i.e. 1st level or 2nd level authorityas the case may be through / ChiefManager (Credit) / Chief Manager / AGM (incase of Zones headed by DGM) and DGM(in case of Zones headed by GM).

In case of sanctions to be made by Ist levelauthority, at Zonal Office, such proposalsshall be routed through Credit Committeesconstituted for the purpose.

Duplicate(First copy to besubmitted toZonal Office andretain the secondcopy as branchcopy)

iii) Head Office At Branch level and l Zonal Office level,procedure as applicable for proposalsfalling under Zonal Office powers.

At Zonal Office Level:

Appraisal should be done as per the

Triplicate.First & secondcopies to be sentto Zonal Officeretaining thirdcopy at branch.

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procedure indicated for proposals fallingwithin the powers of Zonal Manager.

After completing the processing, a note withspecific recommendations of the ZonalManager has to be submitted to Head

Office along with a copy of the proposal. Acopy of the proposal should be retained atZonal Office.

At Head Office level:

Concerned Assistant General Manager /Dy. G.M. with the help of the Chief Manager/ Officer handling credit of the concerneddepartment has to peruse the proposal inthe light of the overall experience of theBank in financing such project and submit a

brief of the proposal along with hisviews/recommendations toG.M./E.D/C.M.D/MC for sanction of thelimits through the Credit Committeesconstituted for the sanctions to be madeunder the discretionary powers of G.M. andabove G.M.

If the proposal falls within the powers of theMC/Board, the procedure, as above, wouldbe followed and after the note is cleared byED/CMD, it would be referred to the Board.

Zonal Office toretain secondcopy and send

first copy to HeadOffice.

20. Assessment of Credit Needs

20.1 Bank lending should always be need-based and adequate for the applicant to take upthe proposed project/activity. Both over-financing and under-financing are equallyharmful as they are likely to affect the very viability of the project/activity.

20.2 To have a scientific and accurate assessment of credit needs of an applicant, branchesshould have a clear idea about the following.

i) What is the total cost involved in taking up the proposed project/activity.

ii) What is the contribution from the applicant.

iii) Upto what extent funds for the proposed project/activity are coming from othersources. Eg. Subsidy, borrowings from other banks, institutions, unsecured loansfrom friends and relatives, credit allowed on purchases etc.

Total outlay of the project/activity i.e., (i) above, net of (ii) and (iii) above will normally bethe amount of credit required from the bank.

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20.3 The assessment of credit needs should normally be made depending upon the datafurnished by the applicant. However, branches should take care to see that theestimates/projections are not over-stated or under-stated. While examining the data,branches should make useoftheir commonsense. The knowledge/experience gained bythem in financing same/similar ventures may also be used in this regard; Local enquiries

may also be made wherever necessary. Services of specialist staff can also be availedof and guidance may be sought from the controlling authorities, wherever necessary.

20.4 While examining the total outlay required for the project/activity, branches should ensurethat every item of genuinely required investment, however small it appears to be, isadded to the cost of the project/activity. A suitable provision for contingencies and priceescalations should also be taken into the estimated outlay. The applicant's promise tobring in his contribution should be well supported by his sources/competence/capacity.Similarly any claim to mobilise resources by way of subsidy or outside borrowings shouldalso have been duly substantiated to the satisfaction of the Bank.

20.5 The 'cost of the project' and 'means of finance' should be taken into consideration while

considering sanction ofterm loans to new units. In respectofterm loans to existing units,the cost of the assets to be created and funds available from the applicant and fromother sources should be taken into consideration.

Sensitivity Analysis: A cut off limit of Rs.50 lakhs and above is fixed for sensitivityanalysis in respect of term loans. The outstandings in existing term loans and proposedterm loan is the basis for arriving at the cut off point. The Percentage of reduction andescalation in variables like sales, costs, occupancy rates etc., shall be based on case tocase basis taking into account industry trend with rationale.

20.6 While assessing the working capital requirements, Credit Assessment Methods likeTurnover Method, Inventory Method, Cash Budget Method etc., as applicable as per the

lending norms and loan policy shall be ensured.

20.7 The following are some of the aspects, which should be studied and appropriate limits,sub limits, peak season limits, off-season limits as well as appropriate Margins should bestipulated basing on such study.

i) Whether the activity is seaso