BANKS LENDING FUNCTION SLIDE
08-09Letusimagineyouhavebeenrecruited byanewgenerationBankintooneof
the following positions/roles :Manager Retail
Assets/LoansManagerreditAppraisal/redit AnalystLoan
ManagerManagerorporateBanking/!holesale BankingBANKS LENDING
FUNCTION Manager "M# Manager redit Marketing$hen what are your role
e%pectations &'oushouldhavethebasicknowledgeofaBank(s Lending
)unction*+nowledge of various Loan / redit
,roductsreditAnalysis-#valuation/LoanAppraisal/redit Administration
- ManagementLegalAspectsofBankLending/Loan .ocumentation etc*BANKS
LENDING FUNCTION OUTLINES/LEARNING
OBJECTIVESIMPORTANCEOFBANKSLENDINGFUNCTION (For B!"# $ For %&'
N%(o!/E)o!o*+,NEED FOR LENDING NEED FOR CREDIT PRINCIPLES OF SOUND
LENDINGT-PES OF CREDIT/LOAN FACILITIESVARIOUS FORMS OF CREDIT
OUTLINES/LEARNING OBJECTIVESSEURED LOANS T-PES OF SECURITIES
PRINCIPLES OF A GOOD SECURIT-DIFFERENTT-PESOFPRIME/COLLATERAL
SECURITIESAND T.EIR C.ARACTERISTICSSTEPS IN T.E CREDIT
PROCESST-PESOFFINANCING(SOLE FINANCING/CONSORTIUMFINANCING/MULTIPLE
BANKING ARRANGEMENT/LOAN S-NDICATION,CLASSIFICATIONOFADVANCESFORT.E
PURPOSE OF SEGMENT REPORTINGPRUDENTIAL CREDIT E/POSURE LIMITSBANKS
CORE FUNCTIONSACCEPTINGDEPOSITSOF MONE- GIVING LOANS OR
LENDINGMAKING INVESTMENTSPA-MENTANDSETTLEMENT SERVICESIMPORTANCE OF
BANKS LENDING FUNCTIONFOR T.E BANK 0L'!1(!2 (# %&' 3r(!)(34
)%(5(%+ $ Lo!# r' %&' 1o*(!!% ##'% o6 44 Co**'r)(4
B!"#Lo!#2'!'r%'%&'4r2'#%#&r'o6o3'r%(!2
(!)o*'7Lo!#r'3r'#'!%%&'8!"#2r'%'#%r(#"
'93o#:r'(Cr'1(%R(#";I!%7R%'R(#"$ L(o *@or 334()%(o! o6 B!" 6:!1# (#
4'!1(!2!1(!5'#%*'!%#(!#'):r(%('#*/f
thesetheformerhasevolvedastheprime
functionofthebanksbothduetoregulatory
prescriptionsaswellasforpro0table sustenance*A #&r(!"2' (!
%&' 4o! 3or%6o4(o 4'1# %o2r'%'r(*3)%o!%&'N'%I!%'r'#%I!)o*'
(NII,o6%&'8!">&'!)o*3r'1%o
#&r(!"2'(!!+o%&'r##'%(!(%# 3or%6o4(o7NEED FOR CREDIT
D'*!1#(1'o6%&'')o!o*+0$heconsumers
ofgoodsandserviceswhore1uirefundsfor consumption i*e*2 for
ac1uiring assets like consumer
durablesandnon3durablesandalsoforpure consumption purposes*
T&'#:334+#(1'o6%&'')o!o*+0$he
orporates2Business)irmsinthemanufacturing2
tradingandservicessectorsre1uirefundsforlong3terminvestment4ape%5aswellasforday3to3day
operations 4!orking apital or /pe%5* $hus the need for credit
arises from the supply side as well as the demand side of an
economy*BUSINESS OF LENDING - A ommercialBankscannote%istwithout
performing the vital function of lendingBank Loans/)inance is the
primary source of0nancingformany corporates/business
housesReturnscomeintheformofloan interest2feeincome/servicecharges2
investment income from new deposits
Banksalsouseloanstocrosssellother fee generating servicesBUSINESS
OF LENDING - B Basedon"i6eofloans2lendingcanbe
categorisedinto:R'%(4L'!1(!2!1 ?&o4'#4'/Cor3or%'
L'!1(!2R'%(4L'!1(!20Lendingbybanks4tothe
demandsideoftheeconomy5to7on3orporate Borrowers i*e*2 8ndividuals
and "mall business enterprises* ?&o4'#4'/Cor3or%'B!"(!20Bank
0nance 4to the supply side of the economy5 to orporate ustomers and
8nstitutional 0nance*BUSINESS OF LENDING - C R'%(4 L'!1(!2 F'%:r'#
0- $he ticket si6e of these loans would be small but the no* of
accounts would be large3 $he yield is normally high3 $he risk for
the bank is diversi0ed3 $he level of 7,A is generally low3 #ase of
processing the loan proposals3 Re1uires lot of monitoring time and
costBUSINESS OF LENDING - D ?&o4'#4'/Cor3or%' L'!1(!2 F'%:r'#
0-$hesi6eofloansarelargebuttheno* of borrowers is relatively
small3,roductscouldbe1uitecomplicated
andcustomised/structuredtomeetthe speci0c needs of the client3 $he
yield is normally low 3 $he risk for the bank is very highBUSINESS
OF LENDING - E 3 $he level of 7,A could be high3
Monitoring/Maintenance cost is low3 )ollow up is easier since no*
of accounts is small3"inceticketsi6eisbig2personalised
attentioncanbegiventocustomersby
assigningrelationshipmanagersforagroup of
borrowers3Borrowersarehighlydemandingwithhigh
bargainingpowers2inacompetitiveera2at
timesforcingbankstocompromiseon prudent principles of
lendingREFUIREMENTSFORLENDINGSOURCES OF FUNDS 0 O?NERS CAPITAL 0
"mall portion about 9: 99; ,ost BaselD'3o#(%# 0 $he main source of
funds 4about (!2# 0 "mall portion 4about > =; of the total
funds5*SOUND CREDIT/LOAN POLIC- GOOD S-STEMS $ PROCEDURES
DELEGATIONOFLOANSANCTIONING PO?ERS TRAINED$SKILLEDMANPO?ERFOR
CREDITANAL-SIS;SUPERVISION$ MONITORING;CREDITMAMAGEMENT$ RECOVER-
PRINCIPLES OF SOUND LENDING - A$hecardinalprinciplesof lending are
as follows :Pr(!)(34' o6 Pr:1'!)' $ S6'%+Pr(!)(34' o6 L(!
Lo!/Cr'1(% Po4()+?.AT IS AN IDEAL ADVANCEAN IDEAL ADVANCE IS ONE
?.IC. IS 0GRANTED TO A RELIABLE CUSTOMERFOR AN APPROVED
PURPOSEIN?.IC.T.ECUSTOMER.ASADEFUATE
E/PERIENCESAFEINT.EKNO?LEDGET.ATT.EMONE- ?ILL BE USED TO
ADVANTAGEREPA-MENT?ILLBEMADE?IT.INA REASONABLE PERIOD FROM TRADING
RECEIPTS OR OT.ER KNO?N MATURITIES/ SOURCES7 T-PES OF CREDIT/LOAN
FACILITIES - AFUNDBASEDCREDITFACILITIES(FB,5#-
NON-FUNDBASEDCREDITFACILITIES (NFB,S.ORTTERMLOANS5#-LONGTERM
LOANS?ORKING CAPITAL LOANS 5#- TERM LOANSSECURED LOANS5#- UNSECURED
LOANSREVOLVINGCREDIT5#-NON-REVOLVING CREDIT FACILITIESLINE OF
CREDIT/CREDIT LIMITSDIRECTED CREDIT VS- NORMAL CREDIT T-PES OF
CREDIT/LOAN FACILITIES - BLOAN COMMITMENTSBRIDGE
LOANSASSETBASEDLENDING5#-CAS.FLO? BASED LENDINGFI/ED RATE 5#-
FLOATING RATE LOANSPRODUCTION/BUSINESSLOAN5#- CONSUMPTION
LOANSC.ANNELFINANCING(F(!!)(!2D'4'r#/ D(#%r(8:%or#,SUPPL- C.AIN
FINANCINGCOMPOSITE LOANS (COMBINATION OF TERM LOAN $ ?ORKING
CAPITAL LOAN, VARIOUS FORMS OF CREDIT - AFUNDBASEDCREDITFACILITIES
Cr'1(%6)(4(%('#>&()&'!5(#2'/)44
6or(**'1(%'o:%Ho>/o:%4+o6 6:!1#/)#& 8+ %&' 4'!1(!2 8!"7
NON-FUNDBASEDCREDIT FACILITIESCr'1(%6)(4(%('#>&()&
1o!o%(!5o45'(**'1(%' 1'34o+*'!%o66:!1#8+8!"#8:%
(!5o45')o**(%*'!%o6%&'8!"%o 3+ (! )#' %&' !''1 r(#'#7
VARIOUS FORMS OF CREDIT - BFUNDBASEDFACILITIES?ORKING
CAPITAL0?or"(!2)3(%44o!6or
G!!)(!2)!'r#&(3R(2&%0Fr''&o41orL'#'&o41 3ro3'r%('#
(6, Cr'%(o! o654(1/3'r6')% *or%22' (&, R')o5'r+ (! )#' o6
1'6:4%DIFFERENT T-PES OF PRIMES/COLLATERALSAND T.EIR
C.ARACTERISTICS - BGOODS/COMMODITIES For*4(%('# 0 S%or2' o6
Goo1#A1'! T'r* D'3o#(%#- Lo! 2(!#% Tr:#% R')'(3%#STEPS IN T.E
CREDIT PROCESS - AB!"#Lo!/Cr'1(%Po4()+0Iredit,hilosophy2redit
ulture4Balues.riven2urrent3,ro0t.riven2Market3"hare.riven52Loan/bCectives2Bolume-Mi%ofLoans
4"ectoral-Deographical#%posureLimits52Loan
#valuation/reditAppraisal,rocedures2redit)iles2
7ormson"ecurity/"urety/Margin27ormson)inancial
Ratios2RiskManagementpolicy2Loan,ricing2Loan Monitoring - Recovery
policyEB:#(!'##D'5'4o3*'!%04Market8ntelligence2Market
Research2reditMarketing/"coutingforgoodborrowers2
8nitialRecommendations/Referralsbynewande%isting
ustomers5O8%(!/R')'(5'For*4Lo!A334()%(o!/Pro3o#40
FLoanApplicationin"tandard/,rescribedformat2
Business,roposal/,roCectReport2,romoters(
Report/Background2,ast-,roCected)inancials2redit Reports2 Marketing
- .istribution arrangement etc*ESTEPS IN T.E CREDIT PROCESS -
BCr'1(%I!5'#%(2%(o!/Borro>'rS'4')%(o!0F+nowyour
Borrower/Borrower(s.ue.iligence2redit"creening/redit
)ilter2,re3"anction8nspection2redithecking/Beri0cation
48B8L2#1uifa%2MarketReportsfromustomers2"uppliers2 ompetitors2
#%isting Bankers/)inanciers5E
Cr'1(%A!4+#(#/A33r(#4/E54:%(o!0FBuildingthe
redit)ile2Loan/,roCect/Biability-BankabilityAppraisal
4$echnicalAppraisal/)easibility2#conomicandommercial
Biability/MarketAppraisal2)inancialBiability/Appraisal2Legal
Appraisal2Managerialompetence52)inancial
"tatements/ashGow-,ro0tabilityanalysis2#valuate,rime
-ollateral"ecurities2"urety2Margin2Hualitative
Analysis/ManagementHuality2RiskAssessment-Loan ,ricing2 Loan /Icer
Recommendation for accepting/reCecting
loanproposal2Layingdownsterms-conditionsof"anction
4onditionsprecedent2Representation-!arranties2
AIrmative-negative/restrictiveovenants2#ventsof
.efault52)inal"anction/ApprovalofLoan/redit)acilities2
"tructuringofLimits2Acceptanceofterms-conditionsof sanction by the
borrower4s5/guarantor4s5ESTEPS IN T.E CREDIT PROCESS - C Lo!
Do):*'!%%(o! 0 F"tamping2 #%ecution2 Attestation of
Loan.ocuments2reation-Registrationofharge2
,reservationofLoan.ocuments2,eriodicalRenewal/Revival of Loan
.ocuments/ Acknowledgement of .ebtE Cr'1(% D'4(5'r+ 0 FLoan
.isbursement: /ne "hot or in ,hases in case of $erm Loans/,roCect
)inancing2 or a running account
incase/verdraftorashreditorBill)inanceorregular L/LD facilityE
Cr'1(%Mo!(%or(!2$S:3'r5(#(o!0,ost3sanction/.isbursal
8nspectionofBorrower/)actoryBisit/8nspectionof"ecurity2
#nsuringproperenduseofmoney/assetcreationE Regular/,eriodical
follow up2 supervision2 control - monitoring of credit
facilities/Borrower business units/Assets - "ecurities2
.etectionofearlywarningsignals2correctivemeasures2 updating credit
0le2credit review and credit audit2,eriodical "tock and security
inspection/audit2 redit Risk Management2 redit Administration2
Rehabilitation - RecoveryET-PES OF FINANCING -
ASo4'B!"(!2/F(!!)(!20!hereallthecreditneedsof
aborroweraremetbyasinglebankandwhereallthe
0nancingneedsiswithinthepolicyframeworkofthe 0nancing
bank*Co!#or%(:*B!"(!2/F(!!)(!20Joint0nancingby
severalbankstoasingleborrowero!)o**o! 33r(#4;)o**o!#'):r(%+!1)o**o!
1o):*'!%%(o!7Co**o!#'):r(%+(#)&r2'1%o44
3r%()(3%(!28!"#o!3r(-3##:8#(#78fthe re1uirements of a borrower grow
beyond the comfort level of the sole 0nancing bank due to
prudential norms or risk perception for a particular
segment/borrower2 it would like
anotherbankto0nanceapartofthatenterprise*
"ometimes2evenborrowersmayprefernottodependon
onebankandavailfacilitiesfromvariousbanks*8ftwoor
morebanksgetintoaformalarrangementto0nancethe working capital/term
loan needs of a borrower2 it is called consortium
0nancing/arrangement* T-PES OF FINANCING -
BCo!#or%(:*F(!!)(!2(J77Co!%1J,0$he
consortiumbanksdecideononeofthemembersas
KL'1B!"Lwhonotonlyarrangesperiodic
meetingsofmemberbanksbutalsotakesleadin
assessment2documentation2chargecreation2 monitoring of the account
etc*M:4%(34'B!"(!2/F(!!)(!2Arr!2'*'!%0
!herethecreditneedsofaborrowingcompanyare
metindependentlybydiAerentbankswithoutany formal
agreement/arrangement amongst them* E)&
8!"G!!)'#2(!#%#'3r%'/(!1'3'!1'!% 33r(#4;#'3r%'#'):r(%('#;#'3r%'
1o):*'!%%(o!'%)7Buttheparticipatingbanks
share/e%changeinformationabouttheaccountin their mutual
interest*T-PES OF FINANCING - CS+!1()%(o! o6 Lo!# 0 8n loan
syndication2 a bank generallycalledleadbank/leadarrangeror
syndicatorarrangesagroupofbankstoforma syndicate and this syndicate
provides credit facilities totheborrowerusingacommonloan
documentation*$hesyndicatorbank/leadarranger
mayormaynotprovidecreditfacility2itcharges syndication fee from the
borrower* ?nlike consortium2
inaloansyndication2the0nancing/memberbanks
mayormaynotsharetheriskofdefault*$he borrower deals only with the
syndicator bank*CLASSIFICATION OF ADVANCES FOR T.E PURPOSE OF
SEGMENT REPORTING - AAsperAccounting"tandards9Konsegmentreporting2
bankstodiscloseintheir0nancialstatements2detailsof
theiroperationsinfourbusinesssegmentsandtwo geographical
segments*$hesefourbusinesssegmentsare:(,Tr'#:r+to
includeallinvestmentsinbonds2Dovt*securities2foreign e%change2
money market instruments2 etc*2 i*e*2 the entire
investmentportfolioofthebank*(8,
Cor3or%'/?&o4'#4'B!"(!2toincludealle%posures to ompanies2
Dovernments2 "tatutory Bodies2 ,artnership
)irmsand$rustsetc*2(),R'%(4B!"(!2toinclude
e%posuretoindividualsandproprietaryconcerns:3%o R#7E Cror' !1
%:r!o5'r !o% '9)''1(!2 R#7E0 Cror';
(1,O%&'rB!"(!2O3'r%(o!#toincludeallother banking operations not
covered under above >
segments*T>o2'o2r3&()#'2*'!%#are(,Do*'#%() O3'r%(o!# (8,
I!%'r!%(o!4 O3'r%(o!#7 PRUDENTIAL CREDIT E/POSURE LIMITS
E93o#:r')'(4(!2o!)r'1(%%o(!1(5(1:4/2ro:3 8orro>'r#
0-S(!24'8orro>'r'93o#:r'4(*(%(SBL,09=;ofbank(s
capitalfund*Additionale%posureof=;canbetakenfor 0nancing
infrastructure
proCects-Gro:38orro>'r'93o#:r'4(*(%(GBL,0L:;ofbank(s
capitalfund*Additionale%posureof9:;canbetakenfor 0nancing
infrastructure proCects Cr'1(% E93o#:r' includes both funded and
non3funded credit limits2 underwriting and similar commitments made
by a bank and also investments made by the bank in
shares/debentures issued by such borrowers
C3(%4F:!1forthispurposemeansboth$ier8and$ier88 apital
Gro:3meansandincludesallcompaniesforwhichthe eAective
management/control is the sameKE- ?ORDS/TERMINOLOGIES/GLOSSAR- -
ASME;Cr'1(%A!4+#(#;Cr'1(% A33r(#4;R'%(4L'!1(!25#-
?&o4'#4'/Cor3or%'L'!1(!2; F:!1 B#'1 5#- No!-F:!1 B#'1
Cr'1(%F)(4(%('#;?or"(!2C3(%4 Lo!#5#-T'r*Lo!#;Lo!
Co**(%*'!%#;R'5o45(!25#- No!-R'5o45(!2Cr'1(%;A##'%
B#'1L'!1(!25#-C#&Ho> B#'1 L'!1(!2KE-
?ORDS/TERMINOLOGIES/GLOSSAR- - BS'):r'15#-U!#'):r'1A15!)'#;
S'):r(%+;Pr(*'-5#-Co44%'r4 S'):r(%+;T!2(84'5#-I!%!2(84'
S'):r(%+;Cr'1(%Pro)'##;Cr'1(% F(4%'r;Borro>'r#D:'D(4(2'!)';
K-C;So4'F(!!)(!2;Co!#or%(:* F(!!)(!2;M:4%(34'B!"(!2;Lo!
S+!1()%(o!;Pr:1'!%(4Cr'1(% E93o#:r'L(*(%#S(!24'Borro>'r
L(*(%(SBL,!1Gro:3Borro>'r L(*(% (GBL,To3()# 6or N'9% C4## A44 o6
+o: S&o:41 2'% 3r'3r'1 8'6or' )o*(!2 %o %&'
)4##L'24A#3')%#o6B!"L'!1(!20 D(M'r'!%Mo1'#o6Cr'%(!2
C&r2'o!S'):r(%('#!1Lo! Do):*'!%%(o!
