Circular No.04 /2020-21 Dated: 01.04.2020

All Offices/ Branches of

Jharkhand Rajya Gramin Bank

CREDIT POLICY: 2020-21

“Credit Policy” for Jharkhand Rajya Gramin Bank has been approved by our Bank’s

Board for the financial year 2020-21.

02. Please bring the contents of this Circular to the knowledge of all officers /

employees posted under your control and arrange accordingly.

CHAIRMAN

Encl: As above

CREDIT POLICY

(A) PREAMBLE:

Credit Policy is an embodiment of Banks approach to sanctioning, managing and monitoring Credit risk and to make the systems and controls effective, guided by high ethical standards of commercial prudence and business practices and subject to review by the Board from time to time.

This Policy provides a broad framework for management of loan portfolio putting emphasis on creation of Products and Services as well as asset quality for fulfilment of Banks vision.

The provisions of the Credit Policy are applicable to operations of the Bank and includes Prudential Exposure Norms, Creation of New Loan Products, Income Recognition and Asset Classification Norms, parameters set for Appraisal, Security, Follow-up, Coverage of Risk Factors, NPA Management Policy, Write off policy.

This Policy deals with broad guidelines and approach to administration of the Credit portfolio, Bank may from time to time need to relax or waive some of the prescribed norms based on sound commercial considerations as Special Cases as per Delegation of power to permit such deviations.

(B) STRUCTURE OF CREDIT PORTFOLIO:

Advances to Agriculture Sector:- Agriculture is the most important activity of Rural India and our Bank aims at providing diverse loan products under Direct and Indirect Agriculture like KCC, Irrigation Projects, Farming Machineries/Equipment, Allied Agricultural Activities, Plantation & Horticulture, Agriculture Clinic , Food Processing & Agro-Based Industries and all other schemes/activities under Farm Sector as prescribed by Central / State Government, RBI, NABARD, and other regulatory bodies.

With large number of branches in rural and semi-urban areas, Bank is involved from inception in disbursal of agricultural credit. However, with changing demography and lifestyles in rural India, a strong need for providing comprehensive financial services encompassing savings, credit, remittance, insurance and pension products to the rural populace, has been felt by the Bank. Among other things, the credit requirements for not only farming activity, but also for those relating to Agro-based industrial activity, trade and services and for personal consumption needs of the target group are addressed by the Bank.

All products offered by the Bank for agriculture segment are in alignment with rules by and large prescribed by the regulator, NABARD and the State Level Bankers’ Committee (SLBC).

Bank has recognized that setting up of high value/ hi-tech agricultural projects has been engaging the attention of entrepreneurs and projects covering Agro / food-processing, biotechnology, agri-value chain, agri-marketing infrastructure etc. With a view to responding to emerging opportunities, the Bank extends support in a planned way to these avenues. Further, Bank has also been identifying the thrust areas for short-term business opportunities and devising area/activity specific loan products.

Advances to SME Segment: - SME Segment plays a significant role in economic development of the country generating Self Employment, Job Opportunities and Incremental Income. Our Bank aims at providing diverse loan products under this segment under Small Business Finance, Transport Operators, Small Scale Industries, Service Sector etc. under prescribed rules of RBI, NABARD, Central/State Government and other regulatory bodies.

Advances to Personal Segment: - Our Bank aims at providing diverse loan products to meet people’s credit needs in the retail sector specially by way of Personal Loan (PTL), Auto Loans (Car Loan), Housing Loan, Education Loans, Loans against Bank’s Fixed Deposits / Recurring Deposits, NSC/KVPs, Insurance Policies (not linked to Equity / Unit / Market) etc. The Bank’s extensive network in the state, computerised operations and a large customer base are significant strengths that enable leveraging so as to garner a higher share of the available retail market. In view of the Bank’s thrust on Personal Segment Loans and the steady and significant growth witnessed, the Bank will periodically undertake assessment of concentration risk in housing loans, auto / personal loans etc.

Advances under Employment Generation Programme of GOI: - Our Bank is also implementing schemes/programs launched by Government for employment generation and poverty alleviation in rural & urban areas under PMEGP, MUDRA, NBCFDC, NSKFDC, NSFDC, NSTFDC etc.

Non-Priority Sector Advances: - Bank aims in providing diverse Loan Products, under Non- Priority sector like C&I advances for Commercial Buildings, Schools, Colleges and other Institutions, Professionals e.g. Doctor Plus Scheme, Housing Loan to Public over Rs.35/ 25 lakhs (Metropolitan & Other Center Respectively), all type of Loans under Personal Segment etc.

Micro Credit / Financial Inclusion: - For upliftment of poor mass, the Bank is actively supporting Self Help Groups, Joint Liability Groups by providing timely Credit within the prescribed rules framed by RBI, NABRAD, Central / State Government.

Non-Fund Business: - Bank will sanction Bank Guarantee / Bank Guarantee Limit under NFB. Bank Guarantee can be issued as both Financial and Performance Guarantee and for a period not exceeding 18 months. For longer period (not more than 10 years) prior administrative approval / clearance from competent authority not below General Manager shall be essential, subject to 100% Cash Margin. Normally Bank Guarantee Limit can be sanctioned to high value firms against substantial value of Mortgageable property along with minimum 25% of cash margin at the discretion of the sanctioning authority as per discretionary power delegated to different level of functionaries of the Bank.

Non-constituent borrowers can also be sanctioned Bank Guarantee against 100% Cash Margin.

(C) DUE DILIGENCE, STATUTORY & OTHER RESTRICTIONS:

All Credit proposals are subjected to due diligence process with regard to the Credentials of the Borrower(s) / Guarantor(s), Purpose of Loan, Financial Position of the Borrower(s), Experience, Professionalism, Integrity, Vision, Governance Practices, Track Record of Meeting Financial Commitments, Need Based Requirement of Credit Facilities for Working Capital, Capacity to Service the Loans and Security offered. All loan proposals must be supported by application duly signed by authorised person / persons of the borrowing unit.

Careful Selection of Borrower(s) / Guarantor(s) is essential to maintain asset quality. Hence, scrutiny of credentials and past credit history of Borrower(s) / Guarantor(s) needs to be carried out carefully for ensuring compliance with KYC and AML under Prevention of Money Laundering Act.

Financial Due Diligence: -

1. The financials of main borrowing unit and its major Associates / Sister concerns if any) should be Scrutinised / Reviewed on the basis of Audited financials (where applicable)

2. Balance Sheet must be free from any adverse remarks of the Auditors and if any, each to be separately discussed in the evaluation/appraisal process.

3. Verification of Income Tax, Sales Tax, Service Tax, Excise Returns etc. also to be ensured.

Third Party Entities: -

While Evaluating / Appraising proposals, Bank rely on the Reports / Certificates of several professionals like Chartered Accountants, Empanelled Lawyers and Valuers and Credit Information Agencies. Bank has its own empanelled Third-Party Entities for this purpose.

Diversion of Funds: -

Bank is to take special care of the under noted points in this regard while disbursing loans or during review / renewal of proposals -

1. Utilization of Short-Term Working Capital for Long Term Purposes.

2. Deployment of Loan amount for creation of assets other than those for which loan was sanctioned.

3. Transfer of Loan Amount to Subsidiaries / Sister Concerns or other bodies.

4. Opening of Current Account / Routing of Funds through any other Bank.

5. Investment of borrowed fund in Equities / Debt Instruments.

6. Partial deployment of borrowed fund in the activity for which Loan was sanctioned and the difference not accounted for.

Statutory and other Restrictions: -

1. In terms of section 20(1) of the Banking Regulation Act, 1949, the Bank cannot grant any Loans/Advances on the security of its own shares.

2. No credit facility will be extended for speculative purpose and / or any unlawful activity.

3. In terms of section 20(1) of the Banking Regulation Act, 1949, the Bank cannot grant loans and advances to the Directors and the firms, in which they hold substantial interest, barring admissible exceptions, like loan against Life Insurance Policies, Banks Fixed Deposit etc.

4. No Loan for commercial activity will be granted to Officers/Employees of the Bank except Specific Staff Loans as decided by the Bank.

5. Bank will not grant any loan to industries Producing / Consuming Ozone Depleting Substances (ODS) and Chlorofluoro Carbons (CFC).

6. No Loan shall be granted against Shares, Debentures and Bonds.

7. No credit facilities shall be granted against FDRs or Term Deposits of other Banks.

(D) TAKE OVER OF LOANS:

In the competitive and liberalised financial environment, it has become important for the Bank to aggressively market for good quality advances. One of the strategies for increasing good quality assets in the Bank’s loan portfolio is to take over advances from other Banks / FIs.

Norms for Takeover of Accounts –

Careful selection of borrowers is essential to maintain asset quality. All credit proposals are subjected to due diligence processes in regard to the credentials of the borrower, financial soundness of the borrower, ascertaining need-based requirement of credit facilities, capability to service the loans and security offered etc. Besides these usual due diligences, some additional safeguards are prescribed for takeover of advances. Accordingly, a set of norms/ guidelines for C&I, SME and AGL (Agro based industrial activities) segments have been laid down for takeover of loans. While the guidelines may be reviewed from time to time, current instructions in this regard are as under:

Rating criterion

For exposure above Rs. 25 lakhs: The CRA of the borrower should be SB-7 or better, and the proposed exposure must be backed by Collateral Security as per Bank’s norms. Further, it is also to be noted that no dilution in existing security coverage would be permitted for the amount taken over.

Due Diligence: Operating Units/FOs should assess the requirements of the borrower and obtain sanction for the proposed limits before actually taking over the outstanding liability of the borrower from their existing bank/FI. While doing so, the following aspects should invariably be examined in each case of Take over:

i. Proper due diligence must be carried out on the borrower as well as borrower

group (if applicable) with a view to ensuring the Account proposed to be taken over is being conducted satisfactorily and not classified as SMA 2 or NPA in the books of the transferor bank/FI as also to determine that there are no unsatisfactory features or history of default in conduct of accounts of the company.

ii. The name of the promoters/directors/guarantors should not be appearing in the list of defaulters/willful defaulters/caution lists etc.

iii. Discreet enquiries should be made for cross checking the reasons given by the borrower for moving the account, unless the account is in our target list for marketing.

iv. Market perception regarding the unit and its management is to be recorded. (For this, the appraising officials may record briefly enquiries made and feedback received).

v. Whether potential ancillary business will accrue to the Bank in case competitive pricing is offered.

vi. Terms and conditions stipulated by the existing bank and those proposed by our Bank, with particular focus on ensuring that there is no dilution in security cover in respect of amount taken over.

vii. The Credit Information Report (CIR) from the transferor bank should be obtained in the prescribed format before disbursement. However, Statements of all Accounts of the prospective borrower with Bank/ other banks for the last one year are to be obtained as part of Pre-Sanction exercise and scrutinised for a feel of conduct / financial discipline of the account.

viii. A declaration should be obtained from the applicant unit that it does not have any other credit facility in any bank / FI / NBFC which is irregular and that there are no overdue statutory dues. Such a declaration should be supported by a certificate from the Statutory Auditor of the prospective borrowing company.

ix. To make reference to CRILC data to ascertain whether the prospective borrower is reported as stressed by any other bank.

x. Comprehensive Report (popularly called Data scrubbing) on the prospective borrower to be taken from CIBIL or other Credit Information Company (Equifax, CRIF-Highmark or Experian).

xi. When a Term Loan is also being taken over, it should have a prompt repayment track record, and should also not have been restructured / rescheduled in the preceding two years. Further, the terms of repayment with the existing lender from whom the loan is being taken over must continue.

xii. Generally, Takeover of loans below Rs 25 lakhs is to be discouraged. However, in case of exceptional circumstances, operating units may consider Takeovers on a case to case to basis where product specific minimum scores shall be the threshold.

xiii. In all cases of Takeover, branches / FOs should ensure completion of proper documentation before disbursement.

xiv. Obtention of minimum score under each of the parameters for CRA viz. Business, Financial & Industry and Management risk is mandatory.

xv. Independent verification about the credibility of the customer to be ensured. Services of Fintech/technology companies may be used to cross check the credibility of the borrower.

Collateral Security: No dilution in existing security coverage is permitted for the amount taken over, by releasing the existing security charged to the existing banks. In case Takeover is with enhancement/sanction of additional facilities, the collateral cover for additional credit facilities sanctioned should be as per the norms prescribed by the Bank. Substitution of existing security given to other Banks may be permitted for justifiable reasons by the sanctioning authority, provided the realizable value of the security offered is not less than the value of existing security with other banks. Specific approval of appropriate authority will need to be obtained.

Audited Balance Sheet (ABS) should not be older than 12 months. If ABS is older than 9 months, provisional financials not older than 6 months are to be obtained and analysed so as to be satisfied that the activity level and profitability, liquidity and solvency ratios are broadly in alignment with the estimates / projections.

Ideally, only such accounts should be targeted for Takeover where the unit is in commercial operations for at least two years and no major green field / brown field project is under implementation.

The unit should have been earning profits for at least 2 preceding years. The outlook for sales and profitability should be positive based on realistic estimates of capacity utilization and EBIDTA margins as on the date of assessment.

Stock and Receivables Audit is to be conducted prior to disbursement of any credit facilities above Rs. 5.00 Crores.

Increase in exposure should not exceed 30% (where total taken over exposure is up to Rs.1.00 crore) and 15% or Rs. 30 lakhs or amount equivalent whichever is higher (where total taken over exposure is above Rs.1.00 crore) at the time of take over from other Banks. Enhancement at the time of subsequent renewals will be based on guidelines issued by the Bank from time to time. Any deviation in this regard, authority structure is in place for approval.

Pricing improvement over the existing pricing of other banks should be offered only for accounts meeting rating criterion for Takeover specified above.

A written communication should be obtained from existing bank indicating the up to date dues on payment of which all the securities held including release of personal/corporate guarantees held will be released in favour of our Bank.

Perfection of securities must be completed within 90 days of disbursement.

Takeover norms would apply even if borrower offers to liquidate existing credit facilities before disbursement by our Bank. However, if there is a time gap of say 3 months between liquidation of existing facilities and disbursement by our Bank, the Takeover norms would not apply.

Norms for takeover of advances under Agriculture segment (other than Agri based industries for which norms contained above are applicable): In respect of Agriculture segment, all agricultural Term loans and agricultural cash credits with other banks and Agricultural Credit Societies, Co-operatives are eligible for takeover, subject to the fulfilment of the following terms and conditions of Take over:

i) The minimum amount eligible for takeover would be as under: Nature of Facility Amount

ACC Rs. 1 lakh

ATL – for Allied Activities Rs. 10 lakhs

ATL – for other than allied Activities Rs. 2 lakhs

ii) The maximum amount eligible for takeover would be Rs.2 crores. iii) No prior administrative clearance is required for takeover of agricultural loan.

The reasons for takeover of account are to be discussed in the proposal based on which the Sanctioning Authority will take an informed decision.

iv) No dilution in the security in takeover proposals is permitted. v) Only Standard Assets and regular accounts are eligible for takeover. The

account should have been a standard account in the books of the other banks/ Financial Institution (FI) during the preceding 2 years.

vi) The term loans of incomplete nature are not eligible for takeover.

vii) ATLs with a minimum 2 years repayment program left are only eligible. viii) Advances to borrowers falling outside the ‘Service Area’ of the branch are also

permitted for takeover, subject to adherence of the other instructions. ix) Crop loans converted to Term Loans and Term Loans, which are re-phased,

are not eligible for takeover irrespective of their quantum. x) Additional norms for takeover of Agriculture Loans of Rs.25 lakhs and above:

a) The advances to be taken over should be rated SB-7 or better (the unit should score at least 60% in the financial parameters). b) The unit should have earned net profits post tax in each of the immediately preceding 2 years.

Takeover from our Sponsored Bank, i.e. State Bank of India should be avoided. Under special circumstances, if account is to be taken over from SBI, prior permission of HO will be required.

In this competitive financial environment and for aggressive marketing of good quality Loans Bank takes over advances from other Bank by careful selection of borrowers subjected to due diligence process in all aspects and not diluting existing security coverage and Credit Rating Norms, but in case of enhancement Collateral Coverage to be ensured as per Bank’s Norms and if being considered otherwise specific approval for deviation to be obtained from competent authority before appraising enhancements. All take over loans (except Housing Loan) will be sanctioned by Network Credit Committee / Head Office Credit Committee only. Housing Loan Take over cases may be sanctioned by respective Sanctioning Authorities.

(E) PRUDENTIAL NORMS:

Subject to compliance of Statutory Borrower Exposure Norms i.e. 15% of owned funds in case of Individual Borrowers i.e. 51 Crores and 40% in case of a Group i.e. 137 Crores, and aggregate exposure to Tier II Capital @ 10% i.e. 34 30 Crores, the following prudential limits have been fixed under various schemes for sanction of loans to a single borrower / group.

Particulars of scheme Prudential Limit for Financing

(Amount in lakh)

(A) Farm Sector Individual Group

1. Crop loan / KCC 5.00 10.00

2. Purchase implements

of farm machinery and other 30.00 50.00

3. Plantation & Horticulture 50.00 100.00

4. Irrigation projects viz. Dug well Tube well, shallow Tube well, rain water, harvesting tank, solar water pump with lifting device and construction of pump with lifting device and construction of pump house, drains, platforms etc.

20.00 40.00

5. Commercial dairy comprising of maximum 100 cross bread cows/buffaloes.

100.00 100.00

6. Goatery (Local breed) for mutton purpose unit size 10+1 (breeding cum rearing Unit)

5.00 10.00

7. Other schemes / activities under farm sector As per unit cost approved by

NABARD

8. Loan for Agriculture clinic. 50.00 --

(B) Non-Farm Sector

1 Business / Trade Advances 5100.00 13700.00

2 SSI Unit 5100.00 13700.00

3 Transport Operator 1500.00 1500.00

4 Rural Artisan 10.00 --

5 Housing Loan to public for Residential purpose 250.00 --

6 Builders Finance for Residential /Commercial Building Construction

1500.00 3000.00

7 Personal Loan to public 20.00 --

8 Credit Linkage to SHG -- 20.00

9 Education Loan Scheme 30.00 --

10 Term Loan / Overdraft against mortgage of property

300.00 300.00

11 Trader’s Easy Loan 300.00 300.00

12 Loan under take over norms 1000.00 1500.00

13 Car Loan Scheme 50.00 50.00

14 Loan to Professionals/Self Employed 500.00 800.00

15 Non-Fund Business 1500.00 2000.00

(F) Compliance of Mandatory Norms regarding Priority Sector Advances, Advances to Weaker Section and Exposure to Unsecured Advances:

In compliance of aforesaid norms, Credit Portfolio of the Bank will be managed in the manner that at any point of time -

1. Outstanding amount of Priority Sector Advances does not fall below 75% of total outstanding of Loans.

2. Outstanding amount of Advances to Weaker Section does not fall below 15% of total outstanding of Loans.

3. Outstanding amount of Unsecured Advances does not exceed 15% of total outstanding of Loans except SHG/JLG.

4. Outstanding amount of Agriculture Advances does not fall below 18% of total outstanding of Loans.

(G) PERFORMANCE / FINANCIAL ANALYSIS AND CREDIT RISK MANAGEMENT: -

The primary objective of Performance / Financial Analysis of a firm is to understand and determine the Profitability, Financial Soundness, Operational Efficiency forecasting future prospects of the same. Under this process Balance sheet, Profit & Loss Account Cash Flow Statement etc. are analysed to determine Solvency, Liquidity, Profitability, Sources & Application of Funds. etc. Various ratios of last 2 years are also calculated to analyse the same.

• Quantitative Standards:

The basic quantitative parameters underpinning the Bank’s credit appraisal and the levels that are desired are as under:

i) Applicable to Manufacturing segment:

Financial Ratio(s) Desired Level Acceptable level

Current Ratio > 1.33 > 1.00 (Minimum)

TOL / Adjusted TNW < 4.00 < 5.00 (Maximum)

Long Term Debt / EBITDA < 3.60 < 4.50 (Maximum)

Interest Coverage Ratio > 2.60 > 2.00 (Minimum)

DSCR > 1.50 > 1.20 (Minimum)

FACR 1.25 1.25

ii) Applicable to Trade and Services segment

Financial Ratio(s) Desired Level Acceptable level

Current Ratio > 1.20 > 1.00 (Minimum)

TOL / Adjusted TNW < 5.00 < 7.00 (Maximum)

Long Term Debt / EBITDA < 4.00 < 6.00 (Maximum)

Interest Coverage Ratio > 2.60 > 2.00 (Minimum)

DSCR > 1.50 > 1.20 (Minimum)

FACR 1.25 1.25

iii) While these are indicative levels, there cannot be a definite benchmark, as acceptable levels are case specific, guided by the nature, size and scope of projects and activities. The sanctioning authority considers variations from these levels based on the justifications placed before them; no specific approval is required for divergence between the acceptable level and the actuals.

iv) Hurdle rate SB-10 has been prescribed under internal risk rating model for considering new connection or enhancement in credit limits. In case account is having CRA SB-11 and worse, then necessary approval is to be obtained from the competent authority. However, where a unit has not obtained minimum scores in Financial Risk, Business & Industry Risk and Management Risk under CRA, separate approval is not required to be sought.

v) In case any variance from the desired/acceptable levels of quantitative parameters and minimum scores in FR/BR/MR under CRA are to be discussed in the loan proposal and justifications / mitigation are to be placed before the sanctioning authority for taking informed decision.

Review / Renewal of Advances:

Working Capital facilities under SME Credit Card are sanctioned for 5 years subject to review every year and renewal every 3 years.

Working Capital Facilities under Cash Credit are sanctioned for one-year subject to renewal every year by obtaining Financial Statement from the borrowing unit.

In case, working capital limit is not renewed for valid reasons, approval for continuation of limits for a maximum period of 6 months from the due date must be obtained from the Sanctioning Authority.

Even after expiry of 6 months if renewal process is not complete, approval for further 3 months for continuation of limit along with Review Proposal must be sought for from Sanctioning Authority.

If even after 9 months, full scale renewal is not found possible for valid reasons, administrative clearance must be obtained from competent authority for repeating review in place of renewal along with acceptable justifications, as under -

Limit Sanctioned by

Administrative Clearance to be approved by

Branch Manager Regional Manager

ROCC General Manager

NWCC & HOCC Chairman.

Credit Rating: -

1. All exposures of Rs. 25 lakh and above must be internally rated and CRA must be SB-10 or better.

2. External Credit Rating will be mandatory for exposures of Rs. 50 Crore and above and ECR should be BBB+ or better.

ECR should be obtained from any of the RBI accredited External Credit Rating Agencies namely CARE, CRISIL, India Ratings, ICRA, SMERA and Brickwork. Credit Information Company’s (CIC) Reports:

i. As per Credit Information Companies (Regulation) Act, 2005, collection of information on

borrowers of all Banks and Financial Institutions and its dissemination in the form of Credit Information Reports is being done by four Credit Information Companies (CICs) registered with RBI.

The four CICs are: a. TransUnion CIBIL Limited (TCL) b. Equifax Credit Information Services Private Limited (ECISPL) c. CRIF High Mark Credit Information Services Private Limited (CHMISPL) d. Experian Credit Information Company of India Private Limited (ECICIPL)

ii. CICs are providing Consumer Report for individuals and Commercial Reports for Non-

Individual entities. Whereas TCL, ECICIPL, and CHMISPL are offering CIRs under Consumer and Commercial, ECISPL is offering only Consumer related CIRs and not Commercial CIRs. CIBIL and CRIF High Mark have been identified as preferred CICs for obtaining report for proposal pertaining to MSME/C&I segment and obtaining report from

one or two CICs for these segments will be decided as per following parameters:

Type of Advances Report from one CIC Reports from Two CICs

Secured Loan* Limit up to 10 lakhs Limit above 10 lakhs

Unsecured Loan Limit up to 2 lakhs Limit above 2 lakhs

(* Not applicable for Loans against Specified Securities)

(H) ASSESSMENT OF CREDIT FACILITIES: -

Credit Appraisal

The fundamental purpose of credit appraisal in the Bank has been two-fold. First, to be able to take an informed decision as to the credit worthiness of any proposal; that is, whether it is prudent, worthwhile and desirable for the Bank to take a credit exposure on the applicant entity. Thereafter, where a positive decision is arrived at in this regard, to be able to assess the extent and nature of such credit exposure, the conditions on which such exposures is acceptable and the pricing at which it is considered prudent to operationalise such a credit relationship. A decision as to the credit worthiness of a proposal is arrived at after considering a combination of several factors including: • an assessment of the borrower, covering their background and relevant experience in the area of the proposed entity. • the previous experience of the Bank with the borrower.

• the perceived prospects of the industry or activity proposed. • The already existing extent and quality of the exposure of the Bank to the industry or activity on the one hand and to the borrower on the other. • Policy relating to exposure levels and norms prescribed by the regulators and by the bank for the proposed activity / industry. • The perceived financial strength and the risk rating of the borrower. • The extent and nature of credit risk mitigants proposed, etc. • Having decided that the proposal, as a reasonable and acceptable business risk, is a ‘bankable’ proposition, the next step involves assessing the nature and extent of the proposed exposure. The Bank provides a range of terms and working capital facilities, each of which can be structured either as fund-based products or non-fund-based products or a combination of both.

Methods of Assessment of Credit Facility(ies):

The assessment of working capital is done through - a) Turnover Method b) Projected Balance Sheet Method (PBS) c) Cash Budget Method.

i) Under the turnover method, working capital requirement is computed at a minimum

of 25% of turnover, of which, at least four-fifths is provided by the Bank and balance one-fifth represents the borrower’s contribution towards margin for working capital. This method is applicable for sanction of fund based working capital limit of up to Rs.5 crores or equivalent, as per recommendations of Nayak Committee which had looked into issues relating to financing of Medium & Small Enterprises.

ii) Under the PBS method, the fund requirement is computed on the basis of borrower’s projected balance sheet, the funds flow planned for the current / following year and examination of the profitability and financial parameters etc. The key determinants for the limit can, inter-alia, be the extent of financing support required by the borrower and the acceptability of the borrower’s overall financial position including the projected level of liquidity. The projected Bank borrowing

thus arrived at, is termed ‘Assessed Bank Finance’ (ABF). This method is applicable for borrowers who are engaged in manufacturing, services and trading activities and who require fund based working capital (WC) finance of above Rs.5 crores or equivalent.

iii) Cash Budget method is used for assessing working capital finance for seasonal industries like sugar, tea and construction activity. This method is also used for sanction of ad-hoc WC limits. In these cases, the required finance is quantified from the projected cash flows, and not from the projected values of current assets and current liabilities. Other aspects of assessment like examination of funds flow, profitability, financial parameters etc., are also carried out.

After due appraisal and assessment, appropriate authority sanctions the facility as per Delegation of Power which is already in place, duly approved by the Board.

The working capital facility if not availed within 3 months of the date of sanction or commencement of production will lapse and require revalidation.

Temporary Overdraft (TOD):

This Policy allows sanction of Temporary Overdraft (TOD) / Stand-by Line of Credit (SLC) for not more than 90 days, to the extent of 15% of sanctioned working capital limit, appraising the merit of the reason(s) for which TOD / SLC is applied.

Assessment and Appraisal of Term Loan:

1. On the basis of Performa Invoices

2. Scrutinising cost estimates to ensure that the Project Cost is accurate, comprehensive, reasonable and realistic and if required support from Bank’s empanelled consultants is taken for verification of the reasonableness of the project cost.

3. Normally Maturity of Term Loan, including moratorium does not exceed 10 years except the approved schemes like Housing Loan to Individuals, Education Loan, Agricultural Term Loans and other specific schemes.

4. Normally Debt Equity ratio of 75:25 is acceptable to the Bank but in approved specific schemes the same of 90:10 is also accepted.

5. Other Performance Indicators are accepted if within acceptable range, as discussed above in this Loan Policy.

6. Term loans if not availed within 3 months from the date of sanction, need revalidation.

7. Date of Completion (DOC) and Date of Commencement of Commercial Operation (DOCC) to be mentioned in application and appraisal positively.

8. Normally Interest on Term Loan is realized during Moratorium, except the projects exempted by the RBI. However, in deserving cases Funded Interest Term Loan (FITL) can be granted strictly for the applied but not realised interest, due during the moratorium period, by the competent authority not below NWCC.

9. Part of working capital limit can also be converted into WCDL (Working Capital Demand Loan) WCTL (Working Capital Term Loan) on request of Borrower(s) properly appraising the merit of the application, by competent sanctioning authority not below NWCC.

Sanction of Loans:

After due appraisal and assessment, appropriate authority sanctions the loan as per Delegation of Power which is already in place, duly approved by the Board.

Pricing of Loans:

1. All exposures below Rs. 25 Lakh shall be as per Card Rate approved by the Board time to time.

2. All exposures of Rs. 25 Lakh and above shall be priced on the basis of Credit Rating (CRA), as per prevailing norms of Sponsoring Bank.

3. Power to reduce the pricing below Card Rate shall be vested with the NWCC, for all the cases where sanctioning authority is below NWCC. For other accounts, the powers will be bested with HOCC.

(I) DELEGATION OF FINANCIAL POWER: -

Delegation of Financial Power, duly approved by the Board is in place which may be treated as such as part of this policy.

(J) SECURITY, INSURANCE AND DOCUMENTS: -

All loans are sanctioned with certain terms and conditions to be complied with by the borrowing unit (covenants) to bring credit discipline amongst the borrowing units, help monitoring its performance and compliance to credit terms.

The important aspects are as hereunder.

Primary Security: - It is the hypothecated asset created out of the credit facility extended and by virtue of hypothecation; Bank has the right to seize the asset if the borrowing unit is not servicing the loan as stipulated in the agreements executed.

Collateral Security: - Collateral security is any security other than the Primary Security

offered to additionally secure the Credit facility sanctioned by the Bank.

Bank follows the Security Norms prescribed by RBI for different schemes/Sectors.

SME Loans (other than Govt. Sponsored Schemes) sanctioned by Bank apart from creation of charge over Primary Security, are to be covered by Third Party Guarantee, good for the amount of loan involved.

In case of such loans over Rs.50,000/-, apart from above normally liquid security amounting 50% of loan amount by way of lien of Bank’s Fixed Deposits / Recurring Deposits, Pledge of NSC/KVPs, Assignment of Insurance Policies (except Policies linked to Equity/Unit/Market) is preferred.

No fresh STDR should be accepted as Collateral security for loans. STDR to be accepted for the purpose of collateral security must have run for some reasonable time.

Where Equitable Mortgage of immovable properties of the value equal to or more than the amount of loan is available, Liquid Security up to 10% of Loan amount is preferred. Valuation Certificate of the property and Legal Opinion to be obtained from empanelled Valuer and Lawyer. In case of proposals for over Rs. 1.00 Crore, Second Valuation Certificate and Legal Opinion to be obtained.

However in all cases of mortgages, fresh valuation certificate and legal opinion/TR shall be obtained every 3 year.

However, in deserving cases, depending upon the merit of the proposal and Credit Worthiness of the Borrowing Units, Liquid Security may be relaxed to a reasonable extent in each case by the competent authority as below:

Advances of Rs.50000/- to Rs.10 lakhs - General Manager; Advances above Rs.10 lakhs – NWCC, subject to control by the Chairman

In case of Personal Segment Loans, where Check Off Facility is available, Third Party Guarantee good for the amount of loan involved shall be taken along with irrevocable authority from the Borrower/Drawing-Disbursing Authority for realization of EMI from Salary Account of the Borrower. Insurance Cover of Security Charged to the Bank:

Stocks / Movable / Fixed Assets under Hypothecation / Pledge to the Bank are to be insured to the extent of market value at the cost of Borrowing Unit unless the Bank has agreed for waiver of Insurance. The Insurance Policies are to be in joint name of the Bank and Borrowing unit. In terms of the Documents executed by the borrowing unit, they will be primarily responsible for insurance of the assets created out of Bank Loan and to keep the policy alive and if the Borrower(s) fail to do so, the Bank shall insure the assets by debiting the Loan Account with the Premium amount properly diarising the expiry date for further renewal. While insuring mortgaged properties like Buildings, Factories, Machineries/Fixtures therein, are to fully insured against Fire, Theft, Lightening, Cyclone, Earthquake, Flood and other Natural Calamities, Strike, Riot and Civil Commotion under joint name of Bank and the Borrower(s). Crop Loans are invariably to be insured under Crop Insurance Schemes as directed by Regulatory Bodies.

Documents:

Bank has well established documentation system covering all type of Credit facilities to serve as primary evidence of the debts owed by the Borrower(s) and / or obligation guaranteed by the Guarantor(s) and to form the basis for enforcing Bank’s right to recover through legal resources after failure of all other attempts. All the documents are to be revived periodically by obtaining revival letters from Borrower(s) / Guarantor(s) as per Bank’s extant instructions.

Consent Clause: All Loan proposals must be accompanied with Consent Clause.

Follow up, Supervision and Monitoring of Advances:

1. Since Sanctions are based on Projections, Periodic comparison of projections with actual to be ensured.

2. To ensure end use of Funds in to the project for which the loan is sanctioned.

3. Comparing of outstanding of loan with assets available.

4. Taking appropriate action to safe guard Bank’s interest in case of non-compliance of terms & conditions.

5. To ensure recovery of instalments and interest as per repayment schedule.

6. To ensure Borrowing unit does not have un-authorised current account with other Banks.

For effective Credit Administration:

1. Each and every Sanction is to be reported to next higher authority for control.

2. Safe preservation of Documents, Ensuring their Validity and Enforceability in Court of Law.

3. Terms and Conditions Stipulated during sanction to be complied before disbursement

4. Follow up for timely submission of stock statement and Block Debts for computation of Drawing Power (DP).

5. Regular verification of Assets created out of Bank finance.

6. Submission of inspection report to controllers in case of Large Advances.

Credit Process Audit:

Credit Process Audit of loans over Rs.10.00 Lakhs to be conducted mandatorily by designated Officers of the Bank, before disbursement.

Credit Audit:

Annual Credit Audit to be conducted for all sanctions (FB+NFB) over Rs. 5.00 crore.

Stock Audit:

Stock Audit by Chartered Accountant Firm selected by Bank, for all units with exposure of Rs. 5.00 crores and above.

Legal Audit:

Legal Audit to be conducted for all accounts over Rs.1 crore (FB+NFB). Subsequent Legal Audit to be carried out at the time of enhancement of limits and/or whenever new documents are executed.

(K) DOCUMENTATION STANDARDS: -

The ultimate objective of documentation - which is to serve as primary evidence of the debt owed by the borrower, or obligation guaranteed by the guarantor, to be relied upon in the event of any subsequent dispute between the Bank and the borrower and / or guarantor. Documents also form the basis for enforcing the Bank’s right to effect recovery through legal recourse where all other avenues have failed.

Documentation is a continuous and ongoing process covering the entire duration of an advance comprising the following stages:

i) Pre-execution formalities: Searches at the office of the Land Registry to check the existence or otherwise of prior charge over the immovable property offered as security, etc., as also taking other necessary precautions before creating equitable / registered mortgage, including obtention of the lawyer’s opinion as to the clear, absolute and marketable title to the property based upon the genuineness, completeness and adequacy of the title deeds provided.

ii) Execution of Documents: It covers obtention of proper documents, appropriate stamping, and correct execution and recording thereof as per laid down instructions and as per terms of sanction of the advance. A copy of the loan agreement along with all its enclosures will be delivered to the borrower(s) at the time of sanction / disbursal of loans and acknowledgement of receipt thereof obtained. Embossing of stamps on loan documents will be done by the Branch Manager of the respective branch wherefrom the loans will be advanced. The embossing will be done by the Branch Manager by putting his signature across the Stamp(s) over the branch’s seal.

iii) Post-execution formalities: This phase covers the completion of formalities in respect of mortgages, if any, registration with the Registrar of Assurances, wherever applicable. All existing mortgages and forthcoming mortgages have to be registered, on an ongoing basis, with the Central Electronic Registry under SARFAESI Act, 2002 - (CERSAI).

• The following types of Security interests are also required to be filed now on the CERSAI Portal:

a) Particulars of creation, modification or satisfaction of security interest in immovable property by mortgage other than mortgage by deposit of title deeds shall be filed in Form I or Form II, as the case may be, and shall be authenticated by a person specified in the Form for such purpose by use of a valid digital signature.

b) Particulars of creation, modification or satisfaction of security interest in hypothecation of plant and machinery, stocks, debt including book debt or receivables, whether existing or future shall be filed in Form I or Form II, as the case may be, and shall be authenticated by a person specified in the Form for such purpose by use of a valid digital signature.

c) Particulars of creation, modification or satisfaction of security interest in intangible assets, being knowhow, patent, copyright, trade mark, license, franchise or any other business or commercial right of similar nature, shall be filed in Form I or Form II, as the case may be, and shall be authenticated by a person specified in the Form for such purpose by use of a valid digital signature.

d) Particulars of creation, modification or satisfaction of security interest in any under construction residential or commercial building or a part thereof by an agreement or instrument other than by mortgage, shall be filed in Form I or Form II, as the case may be, and shall be authenticated by a person specified in the Form for such purpose by use of a valid digital signature.

• Protection from Limitation / Safeguarding Securities: These measures aim at preventing documents from getting time-barred through limitation and at protecting the securities charged to the Bank from being diluted by any subsequent charge that might be created by the borrower to secure his other debts, if any. These objectives are sought to be achieved by:

i) revival letters being obtained within the stipulated period, from borrower /

guarantor;

ii) obtention of ‘Balance Confirmation’ from the borrower / guarantor at least at annual intervals;

iii) making periodic searches in the records of the Office of the Registrar of Companies / Registrar of Assurances;

iv) insuring Assets charged – (unless specifically waived) to safeguard the Bank against the risk of fire, other hazards, etc.;

v) carrying out periodical valuation of securities charged to the Bank; vi) periodic inspection of charged assets.

• Keeping the above broad objectives and the documentation process in view, the Bank has devised standard documents in most cases, for various types of loans given to the borrowers. Furthermore, changes in the documentation procedures and the implications involved are circularised from time to time to all the branches / offices so that those who are responsible for obtaining and safeguarding the documents are made fully conversant with requirements in this regard. This is further strengthened through training imparted by the Bank from time to time

• Unconditional Cancellability: Commitments that are unconditionally cancellable at any time by the Bank without prior notice or that effectively provide for automatic cancellation due to deterioration in a borrower’s credit worthiness shall carry a Credit Conversion Factor (CCF) of 0%. As a result, the credit equivalent for all Unutilised Limits becomes zero, and no Capital Charge is required for any such undrawn commitments. Therefore, Unconditional Cancellability clause which gives the Bank the right to cancel the sanctioned limit without reference to the borrower at any time, needs to be accepted by borrowers to give effect to the Internal Capital Adequacy Framework guidelines of the RBI.

(L) INTERNAL CREDIT RATING – CREDIT RISK ASSESSMENT (CRA): -

For each credit proposal, a credit rating is assigned using the internal credit rating system. The Bank as of now has a unified CRA System, which is used for assessing the credit risk of borrowers as well as facilities (facility rating applicable for exposures beyond Rs.5 crores) viz., working capital, term loan and non-fund based exposures etc., to C&I, SME and AGL segments for total exposure of Rs.25 lakhs and above and scoring models for all products with exposure of less than Rs.25 lakhs. Based on the CRA score, risk rating (SB-1 to SB-16) is awarded to the entity. The SB16 rating is assigned to NPA accounts by default.

• Minimum scores / Hurdle rates of CRA:

The CRA models adopted by the Bank take into account the various risks categorized broadly into financial, business, industry and management risks as well as the environmental, demographic and governance aspects of borrowing entities. These risks are rated separately. Currently, no new connections or enhancements in credit limits are to be considered in respect of accounts rated worse than SB-10 (i.e. SB11 and worse), subject to exceptions like availability of Central Govt. guarantee (sovereign guarantees). The actual models used, the minimum scores under each head, the hurdle rates, etc. are reviewed at regular intervals.

(M) FOLLOW UP, SUPERVISION AND MONITORING OF ADVANCES:

1. Broadly, the objectives of post-sanction follow up, supervision and monitoring, and some of the key areas that need to be kept sight of are:

i) Where sanctions are based on projections, periodic comparison of projections with actuals is most important.

ii) Ensuring end use of funds for only for those activities for which sanction has been accorded. While requisite instructions and procedures to this end have been laid down, it would be the primary responsibility of the borrower to ensure that the funds borrowed have been utilized for the purpose for which they have been lent by the Bank. To this end, the Bank may seek verification, by way of auditor’s certificate, or by way of any other acceptable means.

iii) Comparing the account outstanding to the assets level on a continuing basis. iv) Detecting non-compliance / waivers, from terms and conditions of the sanction and

taking appropriate action to safeguard the Bank’s interest.

v) Ensuring recovery of instalments of the principal in case of term loans as per the scheduled repayment programme.

vi) Examination of exception reports and reports in the nature of early warning signals vii) If the Early Warning Signals indicate possibility of any fraudulent transaction, such

accounts may be considered for classification as Red Flagged Accounts and reported as per RBI guidelines.

viii) Compliance with all internal and external reporting requirements for credit discipline.

ix) If irregularity in an account persists for longer period, or occurs repeatedly, the credit facilities may need to be re-assessed and the issues appropriately addressed.

x) Ensuring that the borrowing entity does not have un-authorized current account with other banks.

2. The undernoted are a set of broad, general guidelines that have a bearing on the monitoring, supervision and follow up aspects of credit administration, and thus need to be complied with care:

i) Each and every sanction should be reported for control to the next higher authority/designated authority.

ii) Safe preservation of security documents, and ensuring their validity and enforceability in a court of law are areas that must not be lost sight of.

iii) Before disbursement of loans/credit facilities, a certificate regarding compliance with terms and conditions of the sanction should be placed before the branch head, as per laid down instructions without fail.

iv) Monitoring of large withdrawals with a view to ensuring that they are not unrelated to the unit’s normal activity.

v) Follow up for timely submission of Statements of Stocks and Book Debts, and their careful scrutiny, for correct computation of Drawing Power.

vi) Verification of assets

vii) Where limits have been allocated, allocatee branch must strictly adhere to the terms and conditions advised by the home branch.

viii) Seeking cash flow statements on quarterly or more frequent basis and their careful analysis in respect of units financed on cash budget method.

IBPC & PSLC POLICY FORMING PART OF CREDIT POLICY

Banks have been permitted by RBI to purchase/sell their priority sector advances at a in order i) To meet their statutory requirement of maintaining priority sector advances stipulated

by GOI/RBI from time to time. ii) To earn an interest margin to enable them to increase profits. At present our bank is adopting following two methods for sale of priority sector lending i.e. 1.IBPC 2. PSLC

INTER BANK PARTICIPATION CERTIFICATE (IBPC) and PRIORITY SECTOR LENDING CETIFICATES (PSLC). IBPC As per RBI Circular DBOD No.BP.BC.57/62-88 dated 31.12.1988 a scheme of inter-Bank Participation Certificate (IBPC) was introduced for schedule commercial banks.

In terms of RBI Circular RBI/FIDD/2016-17/34 Master Direction FIDD.CO.Plan.2/04.09.01/2016-17 July 7, 2016 (updated on 18.06.2019) Regional Rural Banks.

i) Can issue IBPC of a tenor of 180 days on risk sharing basis to scheduled commercial

banks against their priority sector advances in excess of 75%.

ii) Can also issue Inter Bank Participation Certificates (IBPCs) of a tenor of 180 days

(minimum Participation period 91 days) to Regional rural Banks in respect of

their priority sector advances in excess of 75% of their outstanding advances on risk

sharing basis.

SCHEME OF INTER-BANK PARTICIPATIONS-GUIDELINES Introduction: The Working Group on the Money Market (Chairman Shri N.Vaghul) had recommended the introduction of Inter-Bank Participations, with a view to providing an additional instrument for easing out short term liquidity within the banking system. The said recommendation has been accepted and the following scheme of Participations has been framed. The salient features of the Scheme are given below: There will be two types of Participations:

I. Inter-Bank Participations with Risk Sharing; and

II. Inter-Bank Participations without Risk Sharing.

I. Inter-Bank Participations with Risk Sharing: The primary objective of the Participations is to

provide some degree of flexibility in the credit portfolio of banks and to smoothen the working of

consortium arrangements.

1. Applicability of the Scheme: The scheme will be confined to scheduled commercial

banks and Regional Rural Banks.

2. Period of Participations: The minimum period of such Participation will be 91 days,

while the maximum period will be 180 days.

3. Rate of Interest: The rate of interest on Participations would be left free to be determined

between the issuing bank and the participating bank, subject to a minimum of 14.0 per

cent per annum. In terms of RBI Cir.No. DBOD.No. BC.177/13.07.93 dated 11.10.1993

the stipulation relating to the minimum rate if interest of 14% per annum on Inter-Bank

Participation with risk sharing has been withdrawn.

4. Selection of Accounts: Banks will allot such Participations only in respect of advances

classified under Health Code No. 1 status (Standard Assets). The aggregate amount of

such Participations in any account should not exceed 40 per cent of the out standings in

the account at the time of issue. During the currency of the Participations the aggregate

amount of Participations should be covered by the outstanding balance in the account. In

case the outstanding balance falls short of the participations outstanding, the issuing bank

will reduce the Participations to the extent necessary and if need be, issue Participations

for smaller amounts.

5. Accounting: In the case of the issuing bank, the aggregate amount of Participations

would be reduced from the aggregate advances outstanding. Such transactions will not be

reflected in the individual borrower's accounts but will be only netted out in the General

Ledger. The participating bank would show the aggregate amount of such Participations

as part of its advances. The issuing bank will maintain a register to record full particulars

of such Participations. There will be no privity of contract between the borrower and the

participating bank and to avoid any difficulty, banks will incorporate in the cash credit

agreement of the borrowers an appropriate clause permitting the lending bank to shift a

part of the advance to any bank, without notice to the borrowers, by way of Participations.

The agreement may also provide that in the event of issue of Participations the issuing

bank would continue to represent the participating bank in protecting the latter's interests.

6. Risk: The risk would be deemed to have crystallized when the issuing bank recalls the

advances and stops operations in the relative account. In such a case the issuing bank

would give due notice to the participating bank intimating the default.

7. Repayment: The issuing bank will normally repay the amount of Participations together

with interest to the participant bank on the date of maturity, excepting when the risk has

materialized. In cases where risk has materialized the issuing bank will take necessary

action, in consultation with the participating bank and share the recoveries proportionately.

8. Documentation: All banks wishing to participate in the scheme should subscribe to the

"uniform code for Participations" prepared by IBA which will spell out clearly their inter-se

rights and obligations in relation to the securities covered by the advances in question.

9. Transferability: Participations will not be transferable.

II. Inter-Bank Participations without risk sharing: The primary objective of this type of Participation is to even out short term liquidity. The Participation should be backed by the cash credit accounts of the borrowers.

1. Applicability of the scheme: The scheme will be confined to scheduled commercial

banks only.

2. Period of Participation: The tenure of such Participations will not exceed 90 days.

3. Rate of Interest: The rate of interest would be determined by the two concerned banks

subject to a ceiling of 12.5 per cent per annum.

4. Accounting: The issuing bank will show the amount of Participations as borrowing while

the participating bank will show the same under Advances to bank i.e. due from banks.

The Participations would be treated as part of the net Demand and Time Liabilities and

net bank balances for purposes of statutory reserve requirements.

5. Repayment: On the date of maturity, the issuing bank will pay the amount of

Participations with interest to the participating bank irrespective of the default if any in the

advance in question.

6. Transferability: Participation will not be transferable.

7. Reporting of Data: As a result of outstanding Participations being treated as borrowings,

the issuing bank should report such borrowings in the fortnightly return under Section

42(2) of the Reserve Bank of India Act, 1934. The same should be done by including the

amount of Participations, by the issuing bank under 'Borrowings from banks' i.e. item l(b)

in Form 'A'. The participating bank should include the amount of Participations taken in

advances to banks under item III(c) in Form 'A'. The amount of Participations so included

in the relative items of Form 'A' should be clearly indicated as a foot-note to the return,

showing separately also Participations on risk sharing basis.

PSLC (Priority Sector Lending Certificate) PSLC (Priority Sector Lending Certificate ) is another mode of Purchase/Sale of Priority sector advances as permitted by RBI. Reserve Bank of India has issued detailed guidelines vide its Circular No. FIDD.CO.Plan. BC.23/04.09.01/2015-16 dated 07th April, 2016 for trading in Priority Sector Lending Certificates (PSLCs). Priority Sector Lending Certificate (PSLC) is an alternate to Inter Bank Participation Certificate to enable banks having surplus priority sector portfolio , to sell it through online trading platform i.e., e-Kuber portal of RBI. Hitherto, we are selling/buying the surplus/shortfall priority sector advances through Inter Bank Participation Certificate in open market.

In terms of Reserve Bank of India circular guidelines, we can sell surplus Priority Sector lending for the maximum period that will expire by 31st March and will not be valid beyond the reporting date i.e., March 31st, irrespective of the date it was first sold. There will be no transfer of credit risk on the underlying as there is no transfer of tangible assets or cash flow. The payment of fee by buyer to the seller will be market determined. In accordance with the above, we propose to issue/purchase Priority Sector Lending Certificates for the surplus/shortage of priority sector lending of that particular year on E-Kuber platform. Accounting: The fee paid for purchase of the PSLC would be treated as an ‘Expense’ and the fee received for the sale of PSLCs would be treated as ‘Miscellaneous Income’

NPA POLICY OF THE BANK INCOME RECOGNITION, ASSET CLASSIFICATON, PROVISIONING & OTHER

RELATED MATTERS

In order to reflect Bank’s actual financial health in the balance sheet and as per recommendations made by the M. Narsimham Committee on financial system, the RBI has introduced prudential norms for Income Recognition, Asset Classification and Provisioning for the advances portfolio of all the Banks including RRBs. The classification of assets of the bank is to be done on the basis of objective criteria which would ensure a uniform and consistent application of the norms & the provisioning is to be made on the basis of the classification of assets into different categories.

An asset becomes NPA when it ceases to generate income for the Bank. IN terms of international best practices & greater transparency, 90 days overdue norms are to be followed for identification of NPAs w.e.f 31st March 2004. Hence, an advance would be a Non-performing asset where –

(i) Interest and / or instalment of Principal remain overdue for a period of more than 90 days in respect of Term Loan.

(ii) The account remains “Out of Order” for a period of more than 90 days in respect

of an Overdraft / Cash Credit (OD/CC). An account should be treated as “Out of Order”, if the outstanding balance in the account remains continuously in excess of the limit sanctioned / drawing power. Where the outstanding balance in the account is less than the sanctioned limit / drawing power, but there are no credits continuously for 90 days or credits are not enough to cover the amount of interest debited during the same period, these accounts should be treated as “Out of Order”.

(iii) The bills overdue for a period of more than 90 days in case of bills purchased & discounted.

(iv) Any amount to be received remains overdue for a period of more than 90 days in

respect of other accounts.

(v) In case of Direct Agricultural Advances to Individual farmers:

a) A loan granted for short duration crops will be treated as NPA, if the instalment

of principal or interest there on remains overdue for two crop seasons.

b) A loan granted for long duration crops will be treated as NPA, if the instalment

of principal or interest thereon remains overdue for one crop season.

c) Depending upon the duration of crops raised by an agriculturist, the above NPA

norms would be applicable to Agricultural Term Loans availed by them.

Identification of Assets:

The system has to ensure the identification of NPAs & Classification of Assets are done on an

on-going basis and doubt in asset classification due to any reason are settled through

specified internal channel within one month from the date on which the account would have

been classified as NPA as per prescribed norms. Provisions are to be made as at the end of

each month, so that the income expenditure account and for the respective quarters as also

the Profit & Loss account and Balance Sheet for the year end reflects the provision made for

NPAs.

Treatment of Accounts as NPA:

Record of Recovery – The treatment of an asset as NPA should be based on the record of recovery. An advance should not be treated as NPA merely due to existence of some deficiencies which are of temporary in nature. Such as non-availability of adequate drawing power, balance outstanding exceeding the limits, non-submission of stock statements and non-renewal of the limits on the due date etc. Where recovery is in doubt or there is a threat of loss, the asset should be treated as NPA. Borrower-wise and not facility-wise – In respect of a borrower having more than one facility with a bank, all the facilities granted by the Bank will have to be treated as NPA and not the particular facility or part therefore, which has become irregular. Asset Classification (for SME & PER Segment):

Standard Assets – An advance, where recoveries are forthcoming regularly and there are no dues in respect of instalment of loan, interest applied in the account, and other charges, if any debited in the accounts should be treated as standard accounts. Such an account does not disclose any credit weakness and it does not carry more than normal risk associated with the advance. However, this includes regular and temporarily irregular accounts as specified by RBI. IRAC status of such accounts would be 0, 1, 2 & 3.

Probable NPA – Category 1 – If the due amount (instalment, applied interest & other dues if any) remains unrecovered up to 30 days. IRAC status of such accounts would be IRAC-1. Category 2 – If the due amount remains unrecovered above 30 days but less than 60 days. IRAC status of such accounts would be IRAC-2. Category 3 – If the due amount remains unrecovered above 60 days but less than 90 days, such accounts would be categorised as IRAC-3.

Account having IRAC status 1, 2 & 3 (probable NPAs) should be treated as Standard Assets.

Sub-standard Assets – An advance account is identified as sub-standard category of NPA, where –

(i) Interest and/or instalment of Principal remain over dues / unpaid for a period of more than 90 days in respect of TL, ATL for allied activities and DL (Gold) accounts;

(ii) The account remains “Out of Order” for a period of more than 90 days in respect of an OD/Cash Credit account.

(iii) If instalment of Principal and / or interest thereon in respect of KCC (Crop loans) and ATL (other than allied activities) accounts remain overdue / unpaid beyond due date for two crop seasons in case of short duration crops and one crop season in case of long duration crops.

A loan account on being identified as NPA, it would remain in Sub-standard category till completion of the age of 12 months.

As on the date of balance sheet, i.e. 31st March, a sub-standard asset will be one which remained NPA for a period less than or equal to 12 months.

Doubtful Assets – If the arrear amount (Instalment, interest and other charges, if any) in full is recovered from a sub-standard asset, it will be upgraded and turn-up to Standard asset. In case, it is not recovered and the account completes the age of 12 months in sub-standard category, it will automatically go in Doubtful category of NPA.

Doubtful Assets has been classified in three categories: Doubtful 1 – IRAC Status 5 Doubtful 2 – IRAC Status 6 Doubtful 3 – IRAC Status 7

The periodicity of different categories of Doubtful assets & age of NPA as the date of balance sheet would be as under:

Doubtful categories – periodicity Age of NPA

D1 – up to 1 year More than 12 months & up to 24 months

D2 – above 1 year and not less than 3 years Above 24 months but less than 48 months

D3 – above 3 years Above 48 months

Loss Assets – A loss asset is one where loss has been identified by the Bank or internal / external auditor, controlling agencies or RBI, but the amount has not been written-off fully.

Classification of Loan accounts direct as Doubtful or Loss Category:

In respect of loan accounts, where there is Potential threats for recovery due to erosion in the value of security by less than 50% of realisable value assessed by the Bank, the asset may be classified directly as doubtful category. If the realisable value of the security is insignificant, i.e. less than 10% of outstanding, the asset straightway may be classified as loss asset.

Provisioning:

Provision on Standard Asset – (IRAC – 0, 1, 2 & 3)

Banks are required to make a provision against Performing Assets (Standard Assets) for normal risk coverage, as under:

Direct Advance to – i) Agriculture & SME Sector: 0.25%

ii) Commercial Real Estate (CRE) Sector: 1.00% iii) All types of rest standard advances: 0.40%

Provisioning on NPAs

Sub-standard Assets (IRAC-4) – A general provision of 10% on total outstanding should be made without making any allowance for DICGE/ECGC guarantee cover & securities available.

Doubtful Asset – D1 (IRAC 5) – 20% of total outstanding

D2 (IRAC 6) – 30% of total outstanding D3 (IRAC 7) – 100% of total outstanding

Loss Assets (IRAC-8) – 100% of total outstanding

Additional Provision for Standard, Sub-standard and Doubtful assets may be made as per

Bank’s Policy approved by the Board.

NPA MANAGEMENT

The Bank has adopted well defined measures for controlling fresh NPA accretion and resolution of existing NPAs.

1. Review of NPAs / AUCAs: The Bank has formed various committees headed by Chairman / GM to periodically review SMAs/NPAs/AUCAs and suggest resolution and turn around strategies.

2. The first focus in management of SMAs will be possible upgradation of the loan asset

through rectification, re-phasing, restructuring or rehabilitation of borrower’s business. If the branch level review indicates that the problems of the unit are not temporary, viability studies need to be undertaken on a case-to-case basis. Restructuring of the account as an alternative, needs to be explored at the early stages of stress in the account. Viability of the unit and the promoters’ interest and stake are the basic prerequisites for the Bank to undertake restructuring/ rehabilitation. However, right of recompense will be incorporated in every rehabilitation proposal.

3. Scheme of outsourcing of recovery through Recovery Agents/Agencies (RAs) has been reviewed and aligned with RBI Guidelines for Outsourcing of Financial Services.The detailed guidelines for appointment of Recovery Agents/Agencies and monitoring of their conduct include:

i) Model Code of Conduct to be adopted by RAs. ii) Declaration- cum- undertaking to be obtained from RAs. iii) Model Policy & Operating Guidelines for Repossession of Security. iv) Application Form for appointment of RAs. v) Grievances Redressal Mechanism.

4. The Bank has also put in place a mechanism for outsourcing of recovery efforts, to supplement the efforts of the Bank’s staff.

5. Viable units and where promoters show genuine interest in reviving the unit will continue to be supported. Sale of non-core assets in case of over-leveraged companies to be pursued vigorously with the promoters to bring down the interest cost. In other cases, especially where promoters are not cooperating, options to exit or reducing exposure will be actively explored, where feasible. Where despite our best efforts in this regard, it is not possible to exit an account or at-least to reduce our exposure, a reassessment of the situation will be done and if necessary, Bank will consider either an acceptable OTS or in its absence, even consider recalling the account. Bank will examine the various options and initiate measures as appropriate in a time-bound manner, as delays in such situations far from helping matters are likely to lead to erosion of security and increase in the ultimate quantum of the NPA.

6. Settlements through compromise (i.e. one-time settlement of dues) will be a negotiated settlement under which Bank endeavours to recover its dues to the maximum extent possible. Detailed guidelines for compromise settlements have been put in place. Compromise settlements are permitted where cases are pending before Courts/DRTs subject to consent decree being obtained from the concerned Court/DRT.

7. In a compromise, as the Bank agrees to accept an amount less than the total amount due under the relative loan contract, in full and final settlement as a general policy, it is tantamount to cessation of lender-borrower relationship with the borrowing unit, its promoters and guarantors. Ordinarily, no fresh finance will be considered either to the existing unit or to any new unit being promoted by the same promoters / guarantors. However, exceptions may be

made in respect of settlements under various One Time Settlement Schemes of RBI and similar Schemes of the Bank, for which separate guidelines are in place.

8. The Bank would follow a policy of taking the NPAs of doubtful/ loss categories which are either fully or substantially provided for, may be taken off the Balance Sheet and parked in Advances Under Collection Account (AUCA). Detailed operating guidelines are in place. This procedure is not expected to dilute in any way the follow-up for recovery. The structured mechanism prescribed for follow-up of accounts parked in AUCA will be followed meticulously. All internal reviews of NPAs will also include accounts transferred to AUCA.

9. Accounts sanctioned and disbursed, and where repayment has been initiated during the financial year and slipped into NPA category within the first two years of sanction/repayment commencement fall in the category of Quick Mortality Loans. In such loans, appropriate steps to be initiated to bring them back to Standard assets category.

10. Bank has laid down specific instructions in the matter of classification / declassification of Non-cooperative borrowers.

• Wilful default:

Wilful default & action there against - Bank will fully comply with RBI guidelines on wilful defaulters and action there against in terms RBI’s definitions of ‘wilful default’, ‘diversion & siphoning of funds’ and ‘end-use of funds. These instructions apply without any exception to all loan accounts where the outstanding are Rs.25 lakhs or more. The classification / declassification of Wilful Defaulters will be reported to RBI only on approval by the HOCC. At the end of this process, list of wilful defaulters to be advised to CIBIL and other Credit Information Companies (List of Wilful Defaulters– suit filed cases and non-suit filed cases) where a decision has been taken to that effect. RBI has decided that the list of wilful defaulters, has to be sent to Credit Information Companies (CICs) only, on a monthly or a more frequent basis.

• ‘Wilful default’ would be deemed to have occurred if any of the following events is noted:

i. The unit has defaulted in meeting its payment / repayment obligations to the Bank even when it has the capacity to honour the said obligations.

ii. The unit has defaulted in meeting its payment / repayment obligations to the Bank and has not utilised the finance for the specific purposes for which it was availed but has diverted the funds for other purposes.

iii. The unit has defaulted in meeting its payment / repayment obligations to the Bank and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed, nor are the funds available with the unit in the form of other assets.

iv. The unit has defaulted in meeting its payment / repayment obligations to the Bank and has also disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the Bank.

v. The identification of wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.

• The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery of dues shall be initiated expeditiously. The Bank may initiate criminal proceedings against wilful defaulters, wherever necessary.

• The Bank may also initiate criminal action against wilful defaulters, based on the facts and

circumstances of each case after careful consideration and due caution.

WRITE OFF POLICY

1. Eligibility Criteria: -

(i) It would be essential for NPA to be transferred to Protested Bills / Recalled Assets before it is written-off.

(ii) Normally NPA having age of more than three years from the date of sanction /first disbursement would be eligible for write-off.

(iii) Any NPA account irrespective of IRAC status in respect of which legal action has been initiated for lodging claim with CGTMSE would be eligible for write-off.

(iv) Similarly, any NPA account having no security (primary & collateral) may be written-off by making 100% provision there against.

(v) The loan accounts classified as NPA in Doubtful category & loss category i.e. IRAC 7 & 8 would be normally eligible for write- off.

(vi) Only those accounts should be considered eligible for write-off against which 100% provision have been made at H.O. level.

(vii) Fraud and forgery, robbery cases may be written-off anytime provided 100% provision have been made.

2. Conditions for write- off:

Write-off exercise in respect of eligible loan accounts would be done subject to the following conditions: -

(i) The sanctioning authority of the particular loan account himself may not recommend write-off proposal thereof.

(ii) A certificate as per standard format should be furnished in duplicate with each

write-off proposal.

(iii) Writing-off eligible loan accounts would be carried out for Bank’s internal purpose. Its benefit would not pass on to the respective borrowers in any case.

(iv) All sorts of recovery efforts would continue in respect of written- off accounts as

usual.

(v) Initiation of legal proceedings against the borrowers and guarantors in deserving cases (Outstanding above Rs.10000/-as per existing practice) would continue as usual.

3. Processing:

Write-off proposals shall be prepared by the Branches in duplicate and submitted to their Regional Offices with proper recommendations. RO shall scrutinize the proposal and if it is found eligible as per norms of the Bank, shall sanction the proposal within power delegated to ROCC, otherwise submit to H.O. with due recommendation at H.O., the proposal shall be properly checked and disposed-off. Eligible casesshall be sanctioned by the HOCC/NWCC

as per structured Authority according to the power delegated.

4. Structure of the committee: -

(i) HOCC: Chairman of the committee-Chairman General Manager-Member CM/Sr. Manager (NPA) or CM/Sr. Manager (Advance) -Member secretary Two Departmental Heads-Members

Quorum: - the quorum of the committee will be four comprising of Chairman, General Manager, CM/Sr. Manager (NPA), or CM/Sr. Manager (Advance) and any one Departmental Head.

(ii) NWCC: - General Manager will be the chairman of Head office level Network Credit Committee. Three Departmental Heads will be members of the committee. In the absence of CM/Sr. Manager NPA, CM/Sr. Manager Advance will be the Member Secretary of the committee.

Quorum: - The quorum of the committee would be four comprising of General Manager, CM/Sr. Manager NPA or CM/Sr. Manager Advance and any two of the Deptt. Heads. (iii) ROCC:-This Committee will be headed by Regional Manager. Desk Officer

NPA & three other Desk officers will be members of the Committee. In the absence of Desk Officer NPA, Desk Officer Advance and will be the Member Secretary of the committee.

Quorum:-The quorum of the committee would be four comprising of RM, Desk Officer NPA or Desk Officer Advance and any two Desk Officers.

5. Delegation of Power: -

(i) RO level Regional Office Credit Committee (ROCC) headed by Regional Manager- Total loss to the bank per borrower - Rs.1.00 lakhs. (ii) H.O. level Network Credit Committee (NWCC) - Headed by the General

Manager - Total loss to the bank per borrower - Rs.10.00 lakhs. (iii) Head Office Credit Committee (HOCC) Headed by the Chairman –Total loss of the Bank per borrower - Rs.25.00 lakhs. (iv)Where the loss per borrower is above 25 lakhs, prior approval/Post facto confirmation would be obtained from the Board.

6. Control system: -

Proposals sanctioned by ROCC t would be controlled by General Manager,sanctioned by NWCC would be controlled by the Chairman of the Bank whereas sanctioned by the HOCC would be placed before the Board for information and confirmation.

7. Post write-off step: -

(i) Balances of individual loan accounts of sanctioned proposals and summary of the sheet should be verified before passing write-off entries. In case there is any change in the balance of any loan account due to recovery in the sanctioned write-off proposal, the reduced balance after recovery will be written-off and entry should be passed accordingly under advice to controlling offices.

(ii) Head Office will be debited through Branch clearing account at the Branch with sum total of the sanctioned write-off proposals by credit to individual Protested Bill’s account to its closure.

(iii) Relative advice on account of write-off should be sent to H.O. through respective R.O.

(iv) Individual details of write-off loan accounts would be maintained in the write-off register at the Branches manually also.

(v) Any recovery in write-off loan accounts should be credited to charges account (recovery in write-off account).

(vi) In order to have proper control and monitoring all the written-off loan accounts would be parked under the AUCA contra CLAUCA in GL as usual by making suitable entries simultaneously.

(vii)Advance Under Collection Account (AUCA) Shall be reviewed by NWCC

during last quarter of every financial year.

8. Other important issues: -

(i) Regional Office(s) should maintain year wise, Branch wise and proposal wise proper record of written-off cases relating to their region.

(ii) Staff accountability sheet as per format enclosed duly signed by respective Branch Manager and counter- signed by respective Regional Manager should be accompanied with each written-off proposal where total loss of the bank is Rs.50000/- and above.