Table of content Modules Content Page Numbers 1 Credit management in banks 3-13 2 Over view of credit policy and loan characteristics 14-26 3 Evaluating consumer loans 27-32 4 Loan and advances against pledge 33-46 5 Loan and advances against pledge 47-53 6 Financing to small scale industries and large scale industries 54-65 7 NPA management 66-75
Module 1 Credit management in banks Loan application Document that provides the essential financial and other information about the borrower on which the lender bases the decision to lend. For a business loan, it normally requires a detailed business plan that includes current and projected (usually for 3 years, or for the period of the loan) income statement (profit and loss account), balance sheet, and cash flow statement. The applicant firm must specify the loan amount and purpose, period and means of repayment, and guaranties and/or collateral offered. For consumer loans, banks generally use standard forms for the applicant to fill-in the information. A loan application entails neither a pledge by the applicant nor a commitment by the lender. Also called credit application. Loan Application Process Stage 1: Loan applications from applicants in eligible countries (i.e. with less than 10 registered CDM activities at the time of application) will go through initial screening as first step. This will include a) review of basic eligibility criteria and b) basic due diligence on the applicant. It will also include screening of the proposed CDM consultant. UNOPS/UNEP DTU may not process applications if the proposed CDM consultant does not meet the basic eligibility criteria. In such cases, the loan applicant is encouraged to select another pre-approved consultant (within given timeline). Stage 2: Once deemed eligible and in absence of any integrity concerns or concerns regarding the project’s potential registration as a CDM project activity, applications may, if necessary, be further verified , through a site visit usually conducted by a designated country team. Stage 3: Based on the initial screening and information collection a detailed technical assessment will be undertaken, i.e. thorough evaluation of the proposed methodology, the expected emission reduction and the feasibility of the proposed approach, as outlined in the Loan Application Form. Stage 4: Having assessed the application, the loan secretariat will submit a recommendation for a decision by the Technical Review Committee (TRC) at its next meeting, if the application has been submitted in time. Otherwise the application will be evaluated at the following TRC meeting. The TRC, comprised of external and independent CDM technical experts and UNOPS, will decide if the loan shall be approved or not. The above stage-based structure with independent parties involved throughout the process shall ensure best possible screening and selection formation.
CREDIT APPRAISAL PROCESS 1. Receipt of application from applicant 2. Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties documents) 3. Pre-sanction visit by bank officers 4. Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list, etc. 5. Title clearance reports of the properties to be obtained from empanelled advocates 6. Valuation reports of the properties to be obtained from empanelled value/engineers 7. Preparation of financial data 8. Proposal preparation 9. Assessment of proposal 10. Sanction/approval of proposal by appropriate sanctioning authority 11. Documentations, agreements, mortgages 12. Disbursement of loan 13. Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc (on regular basis) LOAN ADMINISTRATION – PRE SANCTION PROCESS Preliminary appraisal: 1. Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues 2. The company’s Memorandum and Articles of Association should be scrutinized carefully to ensure that there are no clauses prejudicial to the Bank’s interests 3. Towards this end the preliminary appraisal will examine the following aspects of a proposal. Bank’s lending policy and other relevant guidelines/RBI guidelines: Industry related risk factors Credit risk rating Profile of the promoters/senior management personnel of the project List of defaulters Caution lists Government regulations impacting on the industry 4. Whether the project cost acceptable or not 5. Debt/ Equity ratio whether acceptable 6. Organizational set up with a list of Board of Directors & indicating the qualifications & experience in the industry 7. Demand and supply projections based on the overall market prospects together with a copy of the market survey report 8. Estimates of sales, cost of production and profitability
9. Projected profit and loss account and balance sheet for the operating year 10. Audited profit loss account and balance sheet for the past three years LOAN ADMINISTRATION – POST SANCTION PROCESS The post-sanction credit process can be broadly classified into three stages: Follow-up Supervision Monitoring Which together facilitate efficient and effective credit management and maintaining high level of standard assets. Extension of credit (a) An extension of credit is a making or renewal of any loan, a granting of a line of credit, or an extending of credit in any manner whatsoever, and includes: (1) A purchase under repurchase agreement of securities, other assets, or obligations; (2) An advance by means of an overdraft, cash item, or otherwise; (3) Issuance of a standby letter of credit (or other similar arrangement regardless of name or description) or an ineligible acceptance, as those terms are defined in§ 208.24 of this chapter; (4) An acquisition by discount, purchase, exchange, or otherwise of any note, draft, bill of exchange, or other evidence of indebtedness upon which an insider may be liable as maker, drawer, endorser, guarantor, or surety; (5) An increase of an existing indebtedness, but not if the additional funds are advanced by the bank for its own protection for: (i) Accrued interest; or (ii) Taxes, insurance, or other expenses incidental to the existing indebtedness; (6) An advance of unearned salary or other unearned compensation for a period in excess of 30 days; and (7) Any other similar transaction as a result of which a person becomes obligated to pay money (or its equivalent) to a bank, whether the obligation arises directly or indirectly, or because of an endorsement on an obligation or otherwise, or by any means whatsoever. (b) An extension of credit does not include: (1) An advance against accrued salary or other accrued compensation, or an advance for the payment of authorized travel or other expenses incurred or to be incurred on behalf of the bank; (2) A receipt by a bank of a check deposited in or delivered to the bank in the usual course of business unless it results in the carrying of a cash item for or the granting of an overdraft (other than an inadvertent overdraft in a limited amount that is promptly repaid, as described in§ 215.4(e) of this part); (3) An acquisition of a note, draft, bill of exchange, or other evidence of indebtedness through: (i) A merger or consolidation of banks or a similar transaction by which a bank acquires assets and assumes liabilities of another bank or similar organization; or