Version: 1 College of Agricultural Banking, RBI, PUNE Management of Advances Dr. Ajit Kumar AGM & MoF CAB, PUNE

Date: 2 College of Agricultural Banking, RBI, PUNE Introduction What is Banking? Loan Policy Bank’s own Guidelines + RBI Guideline =Loan Policy {each broad category of economic activity} + Manual on Loans and advances Loan Policy of Commercial Bank vis- à-vis Cooperative Bank

Date: 3 College of Agricultural Banking, RBI, PUNE Types of Loan Term Loan Cash Credit Book Debt Bill Limit – Bill purchase/ discounting WCDL Export Credit-Pre shipment (Packing Credit) & Post shipment Credit Retail Loan- Housing, Education etc. Overdraft

Term Loan Long Term Stake; Careful Appraisal Project Viability: techno-economic viability, market, competitors Management’s Competence Regulatory Clearances Credit Opinion Report Repayment Capability: DSCR Collateral

Working Capital Requirement Less stringent appraisal requirement but greater/ higher post credit supervision/ surveillance required. Under loaning and excess loaning both are dangerous Need based credit Periodic stress testing required Date: 5 College of Agricultural Banking, RBI, PUNE

Date: 6 College of Agricultural Banking, RBI, PUNE Working Capital Requirement Assessment of working capital requirement: Traditional methods Turnover method-upto Rs.1.0 cr. for non SSI and upto Rs.5.0 cr. for SSI -Gross sales including excise duty -for others UCBs may adopt any method Cash Budget method- products of seasonal nature

Traditional Method Current Liability Current Asset Creditors Current assets – 740 Bank borrowing st method: Current assets – creditors = =440 25% margin to be deducted= =330 Current ratio= current asset/ current liability 740/630 = 1.17 Date: 7 College of Agricultural Banking, RBI, PUNE

Traditional Method Current Liability Current Asset Creditors Current assets – 740 Bank borrowing nd method: (Current asset – margin 25%)- less creditors = =255 Excess borrowing- 75 Current ratio= current asset/ current liability 740/555=1.33 Date: 8 College of Agricultural Banking, RBI, PUNE

Turnover Method (Nayak Committee) Current Liability Current Asset Creditors Current assets – 740 Bank borrowing-330 NWC =80 Projected Sales %of sales=500 less 5%margin i.e =400 Now margin(100) or NWC(80) whichever is higher to be deducted from 25% of sales =400 is the permissible finance Or simplistically 20% of projected turnover i.e.400 Date: 9 College of Agricultural Banking, RBI, PUNE

Working Capital Requirements Actual drawals to be allowed on the basis of DP after excluding unpaid stock Banks to ensure regular and timely submission of monthly statements of stocks, receivables etc. Periodical verification of stock Incentive for Loan system Banks to laydown policy guidelines for periodical review of the WC limit and the same to scrupulously adhered to Date: 10 College of Agricultural Banking, RBI, PUNE

Interest Rate Banks are free to determine lending rates but it should not be exorbitant Interest rate charged by banks should incoporate risk premium having regard to the internal rating of the boprrower Interest spread to be rational. Date: 11 College of Agricultural Banking, RBI, PUNE

Transparent Pricing of loan Banks are required to publish the minimum and maximum interest rates charged on advances and display the information in every branch{Base Rate} A Board approved Policy for charging of Penal Interest No Penal Intt. for loans upto Rs 25000/-for priority sector borrowers. Date: 12 College of Agricultural Banking, RBI, PUNE

Pricing of loan Banks should ensure that the total interest debited to an account should not exceed the principal in respect of short term advances granted to small and marginal farmers. SMF= land holding of five acres and less. An appropriate ceiling of interest+ processing and other charges to be decided and publicised.

Date: 14 College of Agricultural Banking, RBI, PUNE Credit facility to a new borrower UCBs should not finance a borrower already availing credit facility from another bank without obtaining a ‘No objection Certificate’ from the existing financing bank (as per declaration of the borrower/financial statement) – Credit opinion report.

Opening of Current Accounts A declaration that the borrower is not having any credit facility with any other bank. If yes, NoC required from that bank If no response to the request for NoC is received, account may be opened after a minimum waiting period of a fortnight. Date: 15 College of Agricultural Banking, RBI, PUNE

Certification of accounts of non corporate borrowers – Income tax Act 1961 UCBs to ensure that borrowers do not default of payment of statutory dues like PF etc. Date: 16 College of Agricultural Banking, RBI, PUNE

Loan Appraisal Proper Appraisal of Loan No oral sanction Deviation to be recorded- sanction within discretionery powers Adhoc sanction only when original limit utilised fully and supported by proper documents

Monitoring of accounts Ensure end use of fund Ensure that security hypothecated/ pledged to the bank is not tempered with Early warning system: Recognition of potential NPA Date: 18 College of Agricultural Banking, RBI, PUNE

Monitoring operations in loan account Monitoring end use of fund/fund flow to and fro- no loan for FD/KVP The primary responsibility for preventing misuse of funds rests with the management of banks. UCBs to take appropriate steps to review and tighten control measures.

Annual Review of Advances

Valuation of properties – empanelment of valuers

Date: 22 College of Agricultural Banking, RBI, PUNE Exchange of credit information UCBs required to take membership of at least one credit information company and provide credit data (positive as well as negative) to the credit information company. - to incorporate suitable clauses in the loan agreement for the purpose.

Date: 23 College of Agricultural Banking, RBI, PUNE Disclosure of defaulting borrowers Scheduled UCBs are required to submit to RBI at the end of Sept and March every year data on defaulting doubtful, loss and suit filed borrowers with outstanding limit of Rs.1.0 cr. and above Data on suit filed case of Rs.1.0 cr & above and willful defaulters of Rs.25.0 lakh and above is availbale on CIBIL site- Scheduled UCBs to report to CIBIL all cases of willful default Rs.25.0 lakh and above

Loan Restructuring There will not be any asset class degradation upon restructuring in following cases: (i) Project Financing (ii) borrowers engaged in important business activities (iii) housing loan This exceptional treatment is not available to (i) consumer and personal advances (ii) Advances to traders Date: 24 College of Agricultural Banking, RBI, PUNE

Loan Restructuring In case of default in payment of agricultural loans due to natural calamities UCBs on their own may decide to -convert the short term production loan into a long term loan or reschedule the repayment period and -sanction fresh short term loans -these fresh/ restructured loans will not be treated as NPAs and will be governed by fresh terms and conditions Date: 25 College of Agricultural Banking, RBI, PUNE

Loan Restructuring PRECONDITIONS: (i)Provision for diminution in the fair value of restructured Advances Interest sacrifice to be calculated on the basis of discounting present value of cash flow with both pre and post restructuring rate of bank’s BPLR+ appropriate term premium +credit risk premium Simpler method:5% of the exposure (ii)The dues of the bank are fully secured with certain exceptions Date: 26 College of Agricultural Banking, RBI, PUNE

Loan Restructuring Exceptions of (ii) (a) SSI borrowers where outstanding is up to Rs.25.0 lakh (b) Infrastructure projects with an escrow account with valid legal claim and where the cash flows generated form the project are adequate for repayment of the advance Date: 27 College of Agricultural Banking, RBI, PUNE

Gold Loan up to Rs.1.0 lakh Date: 28 College of Agricultural Banking, RBI, PUNE

Advances to Real Estate UCBs should frame comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, single/aggregate limit for such loans, margins, security, repayment schedule etc Policy should be approved by the Board While framing the policy the banks may also consider for inclusion the National Building Code framed by Bureau of Indian Standards (BIS) Date: 29 College of Agricultural Banking, RBI, PUNE

Bill Discounting Banks to have Board approved policy on bill discounting- proper appraisal Banks should not extend bill discounting facility or other non fund based facilities to non-constituent borrower. No accommodation bills; onus on bank to ensure genuineness of trade transactions- any violation Penal Action Date: 30 College of Agricultural Banking, RBI, PUNE

THANK YOU Date: 31 College of Agricultural Banking, RBI, PUNE