This document provides information on the basic requirements and principles of lending by banks. It discusses the credit cycle process, components of a credit policy, types of borrowers and advances, and documents required for different types of credit facilities. It also describes the roles and responsibilities of credit officers in pre-sanction and post-sanction stages. Key aspects of evaluating companies for lending are analyzed, including the balance sheet, income statement, ratio analysis, and case study of a private limited company. The document aims to give a comprehensive overview of the lending process and credit risk management tools used by banks.

1. Unit-1

2. Basic requirements for lending by Banks
Funds Systems &
procedures
Credit
policy
Delegation
Of
powers
Trained
Man
power

3. Principles & objectives of good Lending
 Safety of advances
 purpose of advances & nature of business
 Borrower- The 7 c’s
 Security & safe margin
 Profitability of the project
 Location of the business
 Viability of the project.
 Liquidity
 National policy objectives.

4. General lending norms of a bank
 Credit Investigation
 The C’s of the borrower/ operational experience
 Collection of data from the borrower
 Constitution
 Government regulatory approvals
 Management / organization set up.
 Location of the business (Advantages & disadvantages)
 Production facilities/ marketing tie ups/ selling arrangements
 Analysis of the Financial statements , estimates & projections
 Details of associate / groups concerns if any & their performance
 Guarantee standards ( corporate/ partnership firms/ individuals)
 Structuring of credit limits

5. Credit
cycle
1
Prospecting
2
Credit
investigation
3
Credit
appraisal
4
Credit
approval
5
Credit
Disbursement
6
Credit
Monitoring

6. Credit policy
Promoting desired
Level of growth in credit
Earnings Asset quality
Credit policy is the guiding principles that influences decision making
They are the results of underlying values and beliefs.
They reflect the banks priorities in lending
They decide the Banks credit culture
Objectives of sound credit policy

7. Components
of Credit
Policy
1
Standards to
be met by
the borrower
2
Ratings for
loans &
advances
3
Prudential
limits /
Exposure
norms
4
Standards
for
collaterals
5
Pricing of
loans
6
Legal &
regulatory
compliances
7
Do’s & Don’ts
8
Thrust areas
for credit
expansion

8. Serves as a gate keeper
Ensures that the new loan sanctioned satisfies pre determined standards
Defines thrust areas
Ensures that the loans contribute good income/ follows the regulatory guidelines
Sets accepted risk levels
By defining Segment wise exposures
Prevents risk concentration
Diversification of credit to various areas
Provides pricing strategies
Good risk score borrowers get good rating
Promotes business growth
Provides growth path while taking risk factors into consideration

9. Credit policy- A risk management tool
The important part of credit policy is fixing exposure norms.
Fixing exposure limits basing on its experience & risk perceptions
Shall include (Fund / non fund ) credit limits
Includes leasing , advances against shares/ bonds , units of MF,
financing promoters contribution, bridge loans , underwriting
commitments etc
Exposure limits will cover the following
1. A single counter party
2. A group of connected parties
3. A particular industry/ sector
4. A geographic region
5. A type of credit facility
6. A type of security

10. Types of borrowers
Individuals Others
Single individuals
Joint individuals
Sole proprietor
Partnership firm
Limited company (Pvt / public)
Trusts
Clubs/ society/ association

11. Good credit officer/ manager (pre sanction stage)
 High integrity/ Honesty
 Ability to take independent decision
 Good analysis of financial statements
 Analytical ability
 Good knowledge of various loan policies of the bank
 keen interest in analysis of E I C areas
 optimistic and realistic
 Unbiased

12. Good credit officer/ manager (Monitoring)
Post sanction
 Understanding the importance of sanction letter/ terms / conditions
 Obtaining documents as per manual
 Stamping / creations of charges/ registration of charges with R O C
 Obtaining charge certificates & verifying them
 Insurance of securities with bank's clause
 periodic/ Regular inspection of securities
 Analysis of operations in the account
 Obtaining financial position regularly (monthly/ Q tly/ H Yly, /
annual) and analyzing them
 Periodic/ Regular renewal/ review of the credit limits
 Follow up for recovery of over dues

13. Credit
Disbursement
2
Invoice to be
collected
3
Margins to
be provided
by the
borrower
4
Balance
amount from
Loan
amount to
be debited
5
a DD to
betaken for
full amount
& disbursed
6
Receipt for
the total
amount to be
kept with
documents
1
Documents
to be
obtained

14. Limited companies
An artificial person created by Law with separate legal entity
Liabilities of share holders limited to the extent of their share
holdings
Can acquire/ hold properties / incur obligations .
The rights / responsibilities of share holders are separate from
that of the company.
Company is formed under the provisions of the companies act
Documents to be filed at the time of registration are
MOA/ AO A/ List of directors/ Declaration that all requirements
of company’s act are fulfilled

15. Disbursement in case of companies
Bank official has to follow certain guidelines prior to disbursement .
Search report on prior charges on the securities to be ascertained
Fresh charges to be created in favour of the Bank on the securities
Satisfaction of earlier charges to be ensured

16. Charge creation - MCA-21
No hard
Copies
To ROC
Only
On line
Digital signature
Of designated
Bank officials
ACA/ACS/CWA
On form 8 & 13
Modification
Only on e mode
Form 8 & 13 have
To be combined.
Form 8 with
Digital
Signatures
To be uploaded
In www.mca.gov.in
Fee of Rs 500 paid
Through C C
Receipt generated
Is confirmation
Service
request no.
Will be
Generated
For future
Tracking.

17. Types of advances
Secured Partly secured
Tangible securities with 100%
coverage of loan.
Goods
Commodities
Land
Building
Gold/silver
Corporate/ government securities
Unsecured
Tangible securities with less
than 100% coverage of loan
Goods
Commodities
Land
Building
Gold/silver
Corporate/ government securities

18. Credit facilities
Fund based Non fund based
Term
Loans
Working
capital
Un Secured
loans
L C B G D P G
Long term
Short term
Open Cash credit
Key cash credit
Bills purchase
(Usance/ documentary)
ILC
( DA/DP)
FLC
(DA/DP)
Advance payment
Bid Bond
Performance

19. Documents
D P N
Common to all
loans
Agreement
Term loan
OCC/KCC
Bills
PC
BG/ LC
Forms/ Undertakings
Stamping of the agreement will be as per the state government guidelines

20. Securities Charge Creation
Hypothecation Pledge Mortgage Assignment Lien
Collateral Charge creation
House property LIC Policy Shares/ securities Existing
machineries
Deposits

21. What is Balance sheet-
Pictorial Representation of assets and liabilities of a business as on a
particular date.
Form of a Balance sheet
Name of the Company and the date must appear on the top
Should show two sets of amount in figures.
The total of assets should tally with the total on liabilities
Annual report
Should contain balance sheet, P & L account, various reports
(Director’s, Auditor’s, accounting policies, notes on account ,
schedules to accounts etc )

22. Sources of Funds
Share Holders funds (Share Capital & Reserves)
Loan Funds (Secured & Unsecured)
Deferred payment tax
Total Sources
Application of Funds
Net Fixed Block (gross Fixed assets less Depreciation)
Current assets (Inventories, Debtors, Cash & bank Balance, Loans & Adv)
(Less Current liabilities & Provisions)
Net Current assets
Accumulated losses/ Preliminary & pre op expenses
Intangibles ( Patent, good will)
Total Applications

23. Liabilities/Sources Assets/Applications

24. Long term
Equity ( T N W)
(Share capital, preference share capital maturing after 12 yrs,
General reserve, development rebate reserve, Other reserves,
surplus or deficits in P & L account,
deferred payment tax.
Term liabilities (Not repayable within 12 months
Debentures, redeemable preference shares , term deposits, term liabilities, deferred payment credits ,
other term liabilities etc
Short term
Current liabilities (repayable in 12 months)
Short tern loans from banks (CC / Bills/others),
short term borrowings from others,
deposits & loans (including installments) repayable within one year,
sundry creditors,
unsecured loans ,
advances from customers , agents & others ,
provisions, dividends payable, other statutory dues
others.
Liabilities/Sources

25. Long term
Fixed assets ( Gross block- depreciation)
Other non current assets(not repayable within 12 months)
Investment in subsidiaries & others,
advances & loans,
deferred receivables,
advances to suppliers for capital goods ,
receivables beyond 180 days.
Other miscellaneous assets
Intangible assets (patents, good will, preliminary & pre operative expenses .bad & doubtful debts )
Short term
Cash & bank balances,
investments ( government/ corporate securities , F D ),
receivables ,
Inventories ( RM, SFG, FG, consumables)
Advances to suppliers of raw materials,
advance payment taxes,
other current assets
Assets/Applications

26. Income
Sales
Other income (Operative & non operative)
Accretion in stocks
Expenditure
Material
Personnel
Duties & taxes
Expenses
Interest
Depreciation
Profit for the Year
Provisions for taxes
Profit after taxes
Profit & loss appropriations
Dividends & Tax on dividend
Profit carried to balance sheet

27. Comp-A
Comp-B
2011 2012 2013

28.  Assessing at trends.
 Provides changes in the company over years.
 Comparison with other companies of similar activity in
the market who are competitors

29. Liquidity Ratio
Current ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets-Inventory) / Current Liabilities
Activity Ratio
Inventory turn over= Cost of goods sold (COGS) / Average inventory
Debtors velocity= Total credit Sales / Average receivables
Creditors velocity=Total credit Purchases / Average creditors
Working capital turn over ratio= COGS/ Average net working capital
Total assets turn over ratio= COGS/ Average total assets ( Fixed + current)
Leverage Ratio
Debt-equity= Long term debt / Net worth
Debt to total funds ratio= L T Debts/ share holders funds + Long term debts
Debt to total asset ratio= Total debt/ total assets
Interest coverage ratio= EBIT/ fixed interest charges.
DSCR= PAT + Depreciation + Interest on Term Loans / Interest on term Loan + Term
Loan installments

30. Profitability Ratio
Gross profit margin= Gross Profit X100 /Sales
Net Profit Margin= Net Profit X 100 /Sales
Operating profit ratio= operating profit X 100 / net sales.
Operating ratio = Operating cost X 100/ Net sales
Valuation Ratio
Earnings Per Share (EPS) = PAT / No of equity shares
Price / earnings = Market price / EPS
R O I = EBITX 100/capital employed
ROE= EAT X 100/ Equity
Gearing Ratio
Long term loans / Share holders funds + long term loans
Interest cover
PBDIT/Interest due

31. CASE Study of ABC Technologies Pvt Ltd

32. Filling up of CMA Data

33. Particulars 11 12 13
Capital 36.94 36.94 36.94
Reserves & surplus 94.13 105.04 119.25
Unsecured loans 29.71 32.79 32.81
Term loan 2.80 3.08 5.08
Unsec loans 4.66 4.69 9.33
Deferred tax 10.61 15.28 17.56
Total 178.85 197.82 220.97
Particulars 11 12 13
Net fixed assets 83.78 96.50 97.03
Investments 0.23 0.23 0.23
Debtors 18.54 11.05 29.82
Deposits 4.61 4.61 4.62
Total 107.16 112.39 131.70
Working capital 76.02 117.01 135.54
Sundry creditors (T) 0.50 3.78 1.35
Other C.L 20.25 25.26 23.23
Term loan 2.20 2.80 3.70
Clean loan 2.00 2.00 5.00
(less than one year)
Total 100.97 150.85 168.82
Grand Total 279.82 348.67 389.79
Raw material 26.88 58.80 44.02
Finished goods 32.05 27.54 31.21
Debtors 77.14 115.87 117.43
Cash & bank 4.29 7.05 3.93
Others 26.96 17.16 49.46
Misc expenses 5.34 9.86 12.04
not written off
Total 172.66 236.28 258.09
Grand Total 279.82 348.67 389.79

34. Unit-1 Concluded.