Chapter 6 commercial bank management .pptx

COMMERCIAL
BANK MANAGEMENT
Kanhaiya Singh | Vinay Dutta
Copyright
©
2013
by
McGraw
Hill
Education
(India)
Private
Limited

Corporate Banking
Copyright
©
2013
by
McGraw
Hill
Education
(India)
Private
Limited

Learning Objectives
After reading this chapter you would be able to
understand:
 The RBI’s regulatory aspects to expand, monitor, supervise, and
control the credit to corporate sector
 The types of loans and advances and other credit facilities being
extended to the corporate sector from the banking system
 The concept of consortium lending and syndicated loans and to
analyse a term loan proposal of a corporate firm
 The working capital requirement of a firm and its various
approaches
 The concept of MSMEs and an assessment of their financial
requirements
 The corporate banking policies and process at the bank level

INTRODUCTION
 In India the RBI has both direct and indirect control
on credit delivery system being extended to the
corporate sector
 The RBI issues regulation from time to time about
allocation of credit, interest rate regulations, margin
requirements, qualitative aspects of monitoring,
individual corporate exposure norms etc. to be
adhered by the banks
 Various measures are taken by the RBI to ensure
effective delivery of credit by way of direct monitoring
and follow-up and also advising banks directly over
various issues in relation to corporate banking
activities

RBI GUIDELINES FOR REGULATION
OF LENDING ACTIVITIES IN BANKS
The RBI issues guidelines for controlling the flow of credit
to the corporate sector broadly covering the following
areas:
 Credit Allocation
 Exposure Limits and Group Approach
 Interest Regulations
 Prudential Norms for Loans and Advances
 Margin Money Requirement

Source:
http://rbidocs.rbi.org.in/rdocs/Content/PDFs/BRF090410_AN.pdf

RBI GUIDELINES FOR REGULATION OF
LENDING ACTIVITIES IN BANKS (Contd.)
 Features of Bank Credit
– Maintaining Healthy Assets
– Generation of Income
– Risk Control
– Managing Liquidity
– Search for Innovations
– Basis of Credit Creation
– A Driving Force for Economic Growth
– A Function to Demand Creation

 Principles of Lending
– Principle of Safety
• De-centralised and Diversification Approach in Lending
• Bank’s Due Consideration to the Credit Reputation of a Borrower in the
Market
• Security Valuation
• Interest on Loan
– Principle of Liquidity
– Principle of Profitability
– Principle of Purpose
– Principle of Security
• Primary and Collateral Security
• Personal Security
– Principle of Marketability
– Principle of Value Stability
– Principle of National Interest

 Process of Lending to Corporate Sector
– As a part of the corporate banking business, the banks have
various segments to credit facilities
– The banks prepare loan policy document to corporate
borrowers detailing all the procedures to be followed by the
branches while assessing credit needs of corporate sector
– The banks also have close monitoring and follow-up
mechanism of all the loan accounts to ensure that loan
proceeds have been utilised appropriately and the project
runs successfully
– As per the RBI directives, in the matter of recovery of loans,
the banks would not resort to undue harassment or use of
force

RETAIL BANKING VERSUS
CORPORATE BANKING
 Essential Features of Retail Banking and Corporate
Banking
– The broad features of Corporate Banking are:
• Risk exposure of an individual bank is much higher in corporate
banking as compared to retail banking
• There is a close monitoring and follow-up of large borrower
accounts according to the RBI policy guidelines
• Credit appraisal techniques for corporate loans accounts are
more stringent
• Banks have more considerations on Soundness and viability of
the project besides security aspects in a corporate loan
• Cash flows from the business operations have significant role in
the appraisal of corporate loans

CORPORATE BANKING (Contd.)
Banking
– The broad features of Retail Banking are:
• It focuses on consumer oriented banking and financial service
products, including savings, avenues and cheque facility, money
market instruments, residential home loans, personal loans, and
business loans, etc.
• It stresses more on consumer banking
• Retail banking process utilises their internal and external space to
promote and cross-sell services
• Customer Relationship Management (CRM) techniques are
growing in application among most major retail banks to promote
retail banking
• Retail Credit ensures that the business is widely dispersed among
a large customer base unlike in the case of corporate lending,
where the risk may be concentrated on a selected few projects

CORPORATE BANKING (Contd.)
Banking
– The broad features of Retail Banking are:
• It requires a strong credit assessment capability. If the credit
assessment itself is qualitative, then the need for follow-up in the
future reduces considerably
• Regular constant follow- up: It is inbuilt an ongoing process
• Skilled human resource: It is one of the important pre-requisites
for the efficient management of large and diverse retail credit
portfolio
• Technological support: Retail credit is highly
• technological intensive in nature, because of large volumes of
business, the need to provide instantaneous service to the
customers at large, faster processing, maintaining database, etc.

RETAIL
BANKING
VERSUS
CORPORATE
BANKING
(Contd.)
Similarities and
Dissimilarities in Retail
Banking and Corporate
Banking lending procedures

VARIOUS KINDS OF
LOANS AND ADVANCES
 Difference between Loans and Advances
– Cash Credit
• It is an arrangement under which bank allows the borrower to
raise funds up to a certain limit against securities generally the
receivables or inventories
– Overdrafts
• In this a customer is allowed for a temporary period to withdraw
from the account exceeding the permitted arrangement
– Loan
• It is a component when bank makes an advance in a lump sum
and this is withdrawn by the customer either at one time or in
parts. It is repayable either at one time after a particular period
or in pre-determined installments

VARIOUS KINDS OF
LOANS AND ADVANCES (Contd.)
 Difference between Loans and Advances
– Purpose of Loans
• Agricultural loans are extended to farming activities to
assist in planting and harvesting of crops and supporting
the feeding and care of livestock
• Commercial and industrial loans
• Loans to professional and self-employed persons
• Loans for retail estate business
• Personal loans to meet consumption requirements.
• Loans to financial institutions: It include credit to banks,
insurance companies, finance companies, and other
financial institutions
• Miscellaneous loans

VARIOUS KINDS OF
 Types of Lending
– Fund based lending
• It is granted as a loan or advance with an actual outflow of
cash to the borrower by the bank
– Non-fund based lending
• There are no funds outflows from the bank at the time of
entering into an agreement with counterparty on behalf of
the bank’s customer
– Asset based lending
• The bank basically looks for future cash flows and earning
capacity of the asset being financed, for servicing its debt

VARIOUS KINDS OF
 Types of Loans and Advances
– Short-term Loans
• The loans under this category are repaid within 3 years period.
This consists of:
o Financing working capital needs of the borrower, resulting
from temporary buildup of inventories and receivables
o Seasonal lines of credit are granted to borrowers whose
businesses are subjected to seasonal sales cycles, and hence,
periodic peaking of inventory and other current assets
o The other term loans where re-payment falls within 3 years
period
– Medium-Term Loans
• These are basically term loans granted for creation or acquiring of
assets
• The re-payment period falls over 3 years and up to 7 years.

VARIOUS KINDS OF
 Types of Loans and Advances
– Long-term Loans
• The loan is repaid in more than 7 years and up to 20 years:
o Re-payments are structured based on future cash flows arising
out of assets financed.
o The primary purpose of these loans could be acquisition of
fixed assets, or funding expansion/modernisation/
diversification plans of the firm
o The term loans may be used as substitutes for equity or for
financing permanent working capital needs
o These are fully disbursed at inception, and principal and
interest are repaid depending on the borrower’s capacity to
generate operating cash flows
o The securities for the term loans will be the bank’s claims on
assets purchased from the term loan proceeds or the
collaterals obtained by the bank

VARIOUS KINDS OF
 Other Forms of Loans and Advances
– Clean Advances
• When a loan is granted without any security purely on personal
guarantee or third party guarantee is known as clean advances
– Bills Purchased and Discounted
• Bill discounting constitutes another important type of lending
made by a bank. Bank discount genuine commercial and treasury
bills
– Consumer Credit
• The loan amount is provided to meet personal and consumption
needs such as purchase of cars, refrigerators, television sets and
other durables articles etc. Such loans are advanced to customers
having good record with banks and are repayable by installments
in the short medium duration

VARIOUS KINDS OF
 Loan Syndication and Consortium Finance
– The process of granting loans by more than one bank is in
vogue due to risk diversification when the loan requirement is
for exceptionally higher amount
– Some of the features are:
• As per the RBI guidelines, large credit limits to any single
borrower in excess of 1.5 per cent of individual’s bank deposits
should normally be extended on a participation basis
• In cases where the working capital requirements of a borrower are
financed by a number of banks without consortium arrangement, a
proper procedure for coordination amongst the financing banks in
regard to the appraisal of credit needs, review of performance and
follow-up, and exchange of information should be evolved

VARIOUS KINDS OF
– Process under Consortium Finance
• Under this arrangement, several banks (or financial institutions)
finance a single borrowing firm with common appraisal, common
documentation, joint supervision and follow-up exercises
• Large bank approaches the client, collects the information about
amount of loan, terms and conditions and then calls a meeting of
other banks
• The larger bank which arranges the deal, monitors the accounts
and conducts the proceedings is called lead bank. Generally the
lead bank has major shares in the consortium loan
• The borrower avails credit facility at one place i.e. with the lead
bank. The loan documents are executed at lead bank
• The lead bank disburses the loan amount in full and participation
banks provide their shares to the lead bank
• In case of dispute in the loan account or recovery thereof, the lead
bank will file a case for initiating legal action

VARIOUS KINDS OF
– The RBI has issued detailed guidelines on the mechanism of
consortium advances. These guidelines have been modified from
time to time. We list out some of the important guidelines of the
RBI:
• The overall exposure to a single borrower should not exceed 25 per
cent of the net worth of the banking institution
• The RBI has since withdrawn its instructions for obligatory
formation of consortium
• Though there is no ceiling on number of banks in a consortium, but
the share of a bank as member of consortium should be a minimum
of 5 per cent of the fund based credit limits or Rs. 1 crore
whichever is more
• The borrower who is being financed under a formal consortium
arrangement should not avail any additional credit facility by way
of bills limits/guarantees/acceptances, letters of credit etc. from any
other bank outside the consortium

VARIOUS KINDS OF
– The RBI has issued detailed guidelines on the mechanism of
consortium advances. These guidelines have been modified from
time to time. We list out some of the important guidelines of the
RBI:
• The appraisal of credit proposals will be done by the lead bank.
The borrower has to submit all the necessary papers and data
regarding appraisal of credit limits to the lead bank who will in
turn arrange for preparation of necessary appraisal note and its
circulation to other member banks
• The member banks in a consortium are free to offer different rates
of interest and other charges on their shares based on the policy of
the concerned bank
• The lead bank is free to charge a suitable fee per annum for the
various services rendered to the borrower

VARIOUS KINDS OF
 Advantages and Limitations of Consortium Loan
– Advantages
• The risk of default and other kinds of risk are minimized as participating
banks that bear proportionate share in case of default
• Since there is more than one bank, the credit appraisal in initial stage
becomes more effective as all the member banks adhere due care by virtue
of their expertise
• The banks which are small in size can also get the benefits of consortium
finance
• Consortium finance becomes less competitive as many banks participate.
This results in lower cost of funds to the borrower and higher profits to the
bank
• System is flexible and can be changed to suit the requirements of
participating banks
• All the banks have proportionate rights in the assets
– Limitations
• It is difficult to form a consortium. This requires help of a merchant banker
• The lead bank in the consortium has added responsibilities

VARIOUS KINDS OF
 Loan Documentation for Consortium Loan
– To facilitate common documents, the Indian Bank Association
(IBA) has suggested the following documents for consortium
loan:
• Resolutions to be passed by the borrower’s Board of Directors
authorizing the borrowing company to borrow under the
consortium arrangement
• Working capital consortium agreement
• Joint deed of hypothecation
• Revival letter for purposes of limitation
• Letter of undertaking from the borrower for creating a second
mortgage on the fixed assets
• Agreement to be signed with the lead bank who signs on behalf
of itself and on behalf of other member banks

VARIOUS KINDS OF
 Indirect Consortium Loans
– In Indirect Consortium Loans, the lead bank directly grants
loan to the borrower and then splits the stocking credit assets
by way of share or repayment time
– This arrangement has the following features:
• The lead bank being an expert analyses all the risk factors of the
loan before sanctioning it. Therefore, the assignee bank can get
advantage and avail good clients of the assignor bank
• Since the lead bank still holds some proportion of the loan with
itself. Therefore monitoring of the loan becomes responsibility of
the lead bank
• Interest on the loans and other associated costs are already
finalised. Therefore assignee bank need not have any bargaining
on these issues
• The risk on the loans is shared proportionately

VARIOUS KINDS OF
 Loan Syndication
– Borrower approaches a bank known as the lead manager to arrange
credit and offers the credit terms
– The lead manager prepares an information memorandum about the
borrower and loan requirement duly appraising the risk factors
– The memorandum is circulated among the participating banks. The
participating bank can decide and discuss about the arrangements and
fix all the terms and conditions
– The loan agreement is common and signed by all the member banks
– The borrower informs about his loan requirement to lead bank, so that
lead bank can have tie up arrangement with other banks
– The syndicate members can have two types of groups, that is senior
and junior, the senior syndicate members are mainly the banks which
act as lead banks
– Though it is not mandatory for lead bank to take share in credit
disbursement but in practice lead bank takes due share in the credit
also

VARIOUS KINDS OF
 Loan Syndication
– The lead bank has two types of risk i) Credit risk ii) Syndicated risk on
account of under subscription by participating bank in the syndicate
– This arrangement is very useful for larger projects which required
heavy funds
– In the international context, there are hybrid instruments which have
the feature of relationship lending and also publically traded debt
– The fee structure of syndicated loan involves arrangement fee, legal
charges, underwriting commission, participating fee, facility fee,
commitment fee, agency fee etc.
– The loan can run from 3 to 10 yrs as medium term and after 10 years
as long term
– The arrangement is useful for the banks as it provide opportunity for
participation in credit and also earning income by way of fee and
commission

VARIOUS KINDS OF
Steps in Loan Syndication

VARIOUS KINDS OF
 Advantages of Loan Syndication
– To Borrower
• The borrower does not have to disclose financial information to the
general public
• Syndicated lending is quick and simple method of raising capital
• Huge amount can be borrowed
• The negotiations are centralized
• Single set of documents to be submitted to the lead bank
– To Banker
• The lead bank can earn fee without committing scarce capital
• Enhancement of bank’s reputation and relationship with the client
• Access to lending opportunities without incurring marketing costs
• Market exposure

VARIOUS KINDS OF
Difference between Consortium Finance and Syndicated Loan

TERM LOAN CREDIT
APPRAISAL
 Term Loan
– Term loan is considered by a bank or financial institutions for
a particular time period i.e. the amount of loan is repayable
during a particular pre-determined time period either in lump
sum or through periodical installments
 Purpose of Term Loans
– The term loans are considered for acquiring assets either
movable or immovable. These assets may include land,
building, machinery, equipments and other assets of long
term nature. Such assets are charged to the bank by way of
mortgage or hypothecation as prime securities. The bank has
prime charge over these assets

TERM LOAN CREDIT
APPRAISAL (Contd.)
 Loan Sanction Process
– The borrower submits a project report furnishing all the
financial information and budgeted cash flows for the next 3
to 5 years along with the project report
– The details of the asset to be procured viz. brand of the asset,
supplier, cost, make, mode of payment etc. are also given to
the bank
– The bank makes an assessment about the viability of the
project and on having satisfaction about the project
productivity agrees in principle to finance the asset.
– The loan is sanctioned and the borrower is informed about the
specified terms and conditions for availing the loan
– The loan proceeds could be disbursed either in one time or in
parts depending on the nature of the project and requirement
of funds to utilise for the asset

TERM LOAN CREDIT
APPRAISAL (Contd.)
 Evaluation of Term Loan Credit Report
– A banker basically assesses the term loan viability
and its feasibility on the following four parameters:
• An assessment of the management, operation
process and background of the firm
• An analysis of financial statements
• Analysis of projected cash flows
• Technical viability and financial feasibility of the
project

TERM LOAN CREDIT
APPRAISAL (Contd.)
 Step by Step Process in Term Loan Finance
1. The borrower selects a project and assess financial requirement
through preparation of a project report
2. Identify the assets and their utility to be financed by the bank
3. Borrower approaches the bank for the financial requirements and
satisfies the bank about the viability of the project, timely re-
payment and other security aspects
4. Bank undertakes due appraisal and makes financial viability and
technical feasibility assessment of the project and proposed finance
5. On getting the principal approval from the bank, borrower obtains
quotations of the assets to be procured from the reputed brands
and suppliers
6. Borrower credits the required margin money to the account with
the bank
7. Bank obtains needed loan documents and disburses the loan
amount

TERM LOAN CREDIT
APPRAISAL (Contd.)
8. The bank issues the demand draft in favour of the supplier as per
the quotation after debiting loan amount from the loan account and
margin money from the borrowers account
9. The borrower delivers the demand draft to the supplier and obtains
physical possession of the asset from the supplier
10. The bills, possession letter of asset etc. are delivered to the bank by
the borrower
11. Different assets for the same project can be acquired at different
stages
12. Bank usually provides moratorium period for re-payment of loan
depending upon the operation of the project
13. Bank also registers charge over the assets with registrars of
companies.
14. The re-payment is fixed in monthly/ quarterly/ half yearly
installments

TERM LOAN CREDIT
APPRAISAL (Contd.)
15. The interest for loan is debited to the loan account every month on
the basis of the daily outstanding liability
16. Bank has continuous monitoring and follow-up about the account
and project and also ensures the availability and value of security
from time to time
17. In case of default in loan re-payment, bank initiates process for
recovery
18. In case, the default in loan re-payment persists for long, the assets
charged to bank can be seized by the bank for further disposal
19. The bank can also initiate legal action for non-recovery of liability

WORKING CAPITAL
ASSESSMENT
 Working capital is the total capital required by an
organisation to carry out the day-to-day operations and in
particular to complete a working cycle of a product or a
service
 For day-to-day operations, a unit needs capital for inventory,
amount involved in receivables, and cash required to meet
day-to-day expenses
 Therefore, on one hand the gross working capital equals
current assets and on the other, a firm has current liabilities
(payables) and to that extent requirement to finance current
assets reduces. Therefore
Working Capital Gap = Current Assets – Current Liabilities
 This is also known as Net-working Capital or Liquid Surplus

WORKING CAPITAL
ASSESSMENT (Contd.)
 When Current Assets are less than the Current Liabilities,
the difference will be called the working capital deficit. Such
a deficit indicates that funds from current sources have been
diverted for long term uses i.e. to create fixed assets
 In order to know whether working capital is too high or low,
the following ratios can be used:
Current Ratio = Current Assets/Current Liabilities = 2:1
Quick Ratio = (Current Assets-Inventory)/Current Liabilities = 1:1
 Quick ratio is an indicator of a firm’s short-term liquidity. It
measures firm’s ability to meet short-term obligations with
most liquid assets

WORKING CAPITAL
ASSESSMENT (Contd.)
 Operating Cycle and Working Capital
– Operating cycle can be explained in terms of average time
required in between the acquisition of material, processing of a
product or services till the final cash realisation
– The time required to complete the operating cycle is an
important factor in determining the working capital needs.
Firms with a very short operating cycle can manage with a
relatively smaller amount of working capital
– The Tandon Committee suggested the following three methods
for computation of working capital requirement:
– Maximum Permissible Bank Finance (MPBF) Method I
• The bank can work out the W.C. gap and finance a
maximum of 75 per cent of the gap, the balance 25 per cent
should be financed from long-term funds i.e., owned funds or
term borrowings

WORKING CAPITAL
ASSESSMENT (Contd.)
– Maximum Permissible Bank Finance (MPBF) Method II
• The borrower needs to provide for a minimum of 25 per cent
of total current assets out of long term funds i.e. owned
funds plus term borrowings. The total current liabilities;
inclusive of bank borrowings will not exceed 75 per cent of
the current assets
– Maximum Permissible Bank Finance (MPBF) Method III
• The basic assumption is that the core current assets should
be financed through long term funds. For computing MPBF
for other current assets will be as explained under Method
II

WORKING CAPITAL
ASSESSMENT (Contd.)
– Maximum Permissible Bank Finance (MPBF) – EXAMPLE:

WORKING CAPITAL
ASSESSMENT (Contd.)
 Turnover Method
– As per the recommendation of the committee, working capital can be considered
as a minimum of 20 per cent of the projected annual turnover for the new units as
well as the existing units both
– On working capital limit 5 per cent of the annual turnover is required to be
contributed by the firm. It means a total working capital gap on the basis of
projected turnover is assumed as 25 per cent under this method. Of the total gap
of 25 per cent, 20 per cent can be financed by the bank and 5 per cent should be
contributed by the firm as margin money
– This is applicable for all the working capital limits up to Rs. 500 lakh. This can be
explained through the following example:
– For example if an SSI unit estimates a sales turnover of Rs. 2000 lakh for the
coming year. The working capital assessment would be done as under:

WORKING CAPITAL
ASSESSMENT (Contd.)
 Projected Balance Sheet Method (PBS Method)
– Under this method, assessment of working capital requirement is carried out
in a flexible manner in respect of the borrower considering all parameters
relevant to the borrower
– The projected bank borrowing which reflects the finance sought by the
borrower is validated with reference to the operating cycle of the borrower,
projected level of operations, nature of projected Current Assets/Current
Liabilities, profitability, liquidity etc. where such parameters are accepted,
the projected bank borrowing stands validated for sanction. This amount is
termed as ‘Assesses Bank Finance’
– The current ratio (CR) of 1.33 is considered as a benchmark level of liquidity
instead of the minimum acceptable level
– In cases where the current ratio is lower than the 1.33, it cannot be treated
as a reason for rejection or sanction of the loan proposal or for sanction of the
loan at a lower level
– In each such case, the reasons for low CR or slippage should be examined and
in deserving cases the Current Ratio as projected may be accepted

WORKING CAPITAL
ASSESSMENT (Contd.)
 Cash Budget Method
– Under the cash budget method, the working capital limits are
determined on the basis of the ‘Cash Gap’ after taking into
account monthly and quarterly projections of cash receipts
and out-flows
– Requirements of borrowers and the strength of their Balance
Sheet are taken into account
– The method takes into consideration the fluctuations in fund
requirements over a period of time
– Under this method no strict norms for levels of inventory and
receivables are laid down nor are temporary slippages in
levels of inventory and net working capital are allowed

WORKING CAPITAL
ASSESSMENT (Contd.)
 Other Classification of Working Capital
– Permanent Working Capital
• This is the minimum amount of investments in current assets which
is required to carry out the operations for a particular time period
– Fluctuating Working Capital
• In the business operations, there are cyclical fluctuations therefore a
firm may be required additional assets at different times depending
on the fluctuations, this results in fluctuations in the working
capital requirements likewise working capital may also differ to
meet seasonal requirements
– Working Capital Term Loan
• When a bank provides long-term loan to a firm to meet working
capital margin money of the firm it is called working capital term
loan
– Working capital margin through long-term sources
• A firm may raise resources to meet the margin of working capital
requirements

WORKING CAPITAL
ASSESSMENT (Contd.)
 Working Capital and Commercial Bills
– The banks provide advances against discounting of commercial bills
under the RBI bill rediscounting scheme
– The commercial bill in short-term instruments is popularly known
as bill of exchange
– This instrument is used in the trade transactions
– The following are the advantages of bill discounting to the supplier:
• Payment is received in advance rather than waiting for the
credit period. This amount can be utilised in further operations
to increase better turnover
• The chances of dishonour of the bill are minimized as the bank
becomes intermediary in the process
• Since the RBI provides rediscount facility to commercial banks,
the effective cost of funds to the supplier is relatively lower

WORKING CAPITAL
ASSESSMENT (Contd.)
 Types of Commercial Bills
– Hundi
– Inland Bill
– Foreign Bill
– Derivative Usance Promissory Note
– Demand Bill
– Usance Bill
– Clean Bill
– Documentary Bill

WORKING CAPITAL
ASSESSMENT (Contd.)
 Commercial Paper (CP)
– The Commercial Paper (CP) is another short-term negotiable
instrument which facilitates corporate to raise resources from
money market. It is an unsecured promissory note issued by a
corporate for meeting its short-term fund requirements
– The following are important features of Commercial Paper:
• The company issuing Commercial Paper needs to have good
credit rating from credit rating institute. It should be minimum
of P2 or equivalent
• The company should have a minimum tangible net worth of Rs. 4
crore. Tangible net worth comprises of capital, capital
redemption and debenture redemption, reserves and other free
reserves excluding intangible assets

WORKING CAPITAL
ASSESSMENT (Contd.)
• Company issuing Commercial Paper must be enjoying working
capital limit with a bank. The bank should have categorised
working capital limit as standard asset. RBI has since delinked
issue of CP with bank finance
• The total amount of working capital including issue of Commercial
Paper should not exceed in MPBF (maximum permissible bank
finance) at a given point of time. (since delivered)
• The Commercial Paper can be issued for a minimum period of 7
days and a maximum of 360 days. The validity date of CP should
not exceed the validity of credit rating
• The minimum size of Commercial Paper is Rs. 5 lakh and
thereafter in the multiple of 1 lakh
• The Commercial Paper can be counter guaranteed by a bank or
financial institutions

WORKING CAPITAL
ASSESSMENT (Contd.)
• It is a negotiable instrument and can be transferred number of
times till the maturity by way of endorsement and delivery
• On maturity date, the ultimate holder will receive payment of
Commercial Paper from the issuer
• All India Financial Institutions and primary dealers can also issue
Commercial Paper
• Financial institutional investors can invest in Commercial Paper
• It is issued at discount and payable at face value
• Commercial bank can act as issuing and paying agent for the issue
of CP

WORKING CAPITAL
ASSESSMENT (Contd.)
– The discount rate on Commercial Paper is market determined
– Commercial Paper has become an attractive instrument for both to the
corporate as they are able to raise short-term funds at a cheaper rate
than the bank finance
The financial Shift
Source:
Business
Standard,
11
November,
2011
Section
II
Finance
Page
no.3
refer
http://www.business-standard.com

WORKING CAPITAL
ASSESSMENT (Contd.)
 Certificate of Deposit
– The Certificate of Deposit (CD) is another short-term
instrument which is used to meet working capital requirement
of the corporate sector
– The following are the features of CD:
• This is secured instrument issued by a bank or All India Financial
Institutions where surplus fund can be part with
• This is negotiable instrument and it can be traded in the market by
endorsement and delivery
• This is issued at discount and payable at its face value
• An individual, corporate, companies trust funds and association
etc. can be invest under this instruments
• The minimum of size is Rs. 1 lakh and maximum multiple of Rs. 1
lakh

WORKING CAPITAL
ASSESSMENT (Contd.)
 Certificate of Deposit
– The following are the features of CD:
• The minimum duration of issue is 7 days and maximum
of one year. However in case of CDs issued by financial
institutions, the minimum duration is 1 year and
maximum of 3 years
• The issuing bank pays interests as per the market
demand
• This can be issued in dematerialisation form
• Pre-mature of CDs is not allowed

LOANS TO SMEs
 Since the inception of banks’ nationalisation in India there has been
extra focus on financing to small scale units/enterprises
 However this sector received special attention after enactment of micro,
small and medium enterprises (MSME) development act 2006
 This act has enlarged the scope of micro and small enterprises and
replaced the concept of SSIs, Tiny Sectors and other ancillary units
 Eligibility of MSMEs
– The enterprises engaged in the manufacture or production,
processing or preservation of goods or services with the following
original investment limit in plant, machinery and equipment are
eligible for finance from banks:

LOANS TO SMEs (Contd.)
 Credit Appraisal
– The banks take the required precautions while appraising the
loan requirements of SME sector which may include proper
identification of the entrepreneur, their antecedents in
accordance with KYC Norms/Guidelines, the experience,
educational and social background, technical/ professional
competence, integrity, initiatives, etc.
– The following are the specific aspects which a banker may
look into, which are:
• Checking out for Willful Defaulters
• The acceptability of the product manufactured, market demand,
market competitors
• Environmental stipulations, availability of necessary
infrastructure – roads, power, labor, raw material and markets
• Techno-economic appraisal of unit
• Due evaluation of project report and its feasibility

 Working Capital Assessment
– For working capital limits up to Rs. 5 crore, the turnover method is
considered for financing working capital needs of the SMEs whereby
20 per cent of the projected turnover based on the assumption of a
three-month operating cycle is sanctioned as working capital limit
– The next year’s sales projections submitted by the unit should be
corroborated by the trend in sales over 2 years and last year actual
sales
– This has to be verified with related documents. Such projections
should be within reasonable limits
– The ideal current ratio of 1.33:1 is always preferred
– However in case of SMEs certain relaxations are provided in their
Current Ratio Banks permit SMEs to maintain a minimum current
ratio of 1:1 as against 1.25-1.33:1 stipulated for others
– Classification of Current Assets and Current Liabilities under MPBF
method is arrived as per the RBI guidelines

 Financial Ratios
– The following are suggested as ideal financial ratios to be
maintained by the SME:

 Credit Rating Models for SME
– Hybrid Large Corporate Model
(Fund/Non-fund based limits of Rs. 30 Crore and above)
– Hybrid Mid Segment Model
(Fund/Non-fund based limits of Rs. 5 crore and above but below
Rs. 30 crore)
– SBS Model
(Fund/Non-Fund based limits of Rs. 10 Lakh and above but
below Rs. 5 crore)

 Rate of Interest
– Rate of interest to SME loans is linked with credit rating
obtained by the particular SME. Individual banks have
different interest rate policy for SMEs formulated within the
overall guidelines of the RBI
– The RBI has prescribed the following targets for banks in
respect of MSMEs finance:
• SME finance will form the part of priority sector advances
• Banks are advised to achieve a 20 per cent year-on-year
growth in credit to micro and small enterprises and a 10
per cent annual growth in the number of micro enterprise
accounts

 Rate of Interest
– The RBI has prescribed the following targets for banks in
respect of MSMEs finance:
• In order to ensure that sufficient credit is available to
micro enterprises within the MSE sector, banks are also
advised to ensure that:
o 40 per cent of the total advances to MSE sector should go to
micro (manufacturing) enterprises having investment in
plant and machinery up to Rs. 5 lakh and micro (service)
enterprises having investment in equipment up to Rs. 2 lakh
o 20 per cent of the total advances to MSE sector should go to
micro (manufacturing) enterprises with investment in plant
and machinery above Rs. 5 lakh and up to Rs. 25 lakh, and
micro (service) enterprises with investment in equipment
above Rs. 2 lakh and up to Rs. 10 lakh. Thus, 60 per cent of
MSE advances should go to the micro enterprises

 Targets for Foreign Banks
– Foreign banks are also expected to enlarge credit to priority
sector and include MSME sector
– Within the overall priority sector target of 32 per cent, the
advances to MSE sector should not be less than 10 per cent of
the adjusted net bank credit
– The foreign banks are advised to achieve a 20 per cent year-
on-year growth in credit to micro and small enterprises and a
10 per cent annual growth in the number of micro enterprise
accounts
– These banks also need to ensure sufficient credit availability
within the MSE sector and follow the sub-targets
achievements

 Common Guidelines / Instructions for Lending to
MSME Sector
– All loan applications for MSE units up to a credit limit of Rs.
25,000/- should be disposed of within 2 weeks and those up to
Rs. 5 lakh within 4 weeks provided
– Banks need not insist on any collateral security for the loans
up to Rs. 10 lakh extended to units in the MSME sector
– A composite loan limit of Rs. 1 crore comprising working
capital and term loan may be considered by the banks
through Single Window
– The RBI advised public sector banks to open at least one
specialised branch in each district for providing better and
efficient services to this sector. The existing SSI branches has
been re-designated as MSME branches

 Common Guidelines / Instructions for Lending to
MSME Sector
– Banks’ personnel dealing with MSME sector should develop
requisite expertise in dealing with credit proposals and their
assessment
– Public sector banks were advised to follow a transparent
rating system with cost of credit being linked to the credit
rating of the enterprise
– The RBI desired all banks to provide credit cover on an
average to at least 5 new small/ medium enterprises at each
of their semi-urban/urban branches per year

 Rehabilitation of Sick MSE Units
– As per the definition, a unit is considered as sick when any of
the borrowal account of the unit remains substandard for
more than 6 months or there is erosion in the net worth due
to accumulated cash losses to the extent of 50 per cent of its
net worth during the previous accounting year. The following
are broad parameters for grant of relief and concessions for
revival of potentially viable sick SSI units:

 SIDBI and MSMEs Finance
– The Small Industries Development Bank of India (SIDBI) has
the following mission:
“To empower the Micro, Small and Medium Enterprises
(MSME) sector with a view to contributing to the process of
economic growth, employment generation and balanced
regional development”
– The SIDBI’s extensive support programmes to MSMEs sector
include the following:
• Direct Finance
• Equity Assistance Scheme
• SIDBI’s Credit Guarantee Fund

 SIDBI and MSMEs Finance
– Direct Finance
• Term Loan Assistance
• Various other schemes e.g. Working Capital, Inland Letter of Credit,
Guarantee Scheme, Equity Support, Vendor Development Scheme and
bill discounting facility etc.
• Equity Support
• Strategic Business Initiatives
– Equity Assistance Scheme
• Modernisation/expansion/diversification,
• For marketing/R&D/product development expenses
• Working capital requirements
• For acquisitions in India and abroad and
• Any other expenditure required for growth of the company
– SIDBI’s Credit Guarantee Fund
• Credit Guarantee Fund Scheme
• Risk Sharing Facility

CORPORATE BANKING
OPERATIONS
 Corporate banking includes high ticket exposures
primarily to the corporate sector
 A large share of corporate banking branch accounts for off-
balance sheet businesses
 Hedging solutions form a significant portion of exposures
coming from corporate
 There are various forms of financing, like project finance,
leasing finance, finance for working capital, term finance
etc. form part of corporate banking transactions
 Syndication services and merchant banking services are
also provided to corporate clients in addition to the variety
of products and other services offered
 Corporate banking is also a well-diversified banking
vertical

CORPORATE BANKING
OPERATIONS (Contd.)
 Types of Services in Corporate Banking
– Exclusive corporate client services
– Forex business management
– Cash management services which include fast collection of the
instruments and cash pickup from the client place.
– Customize business solutions
– Trade and channel finance
– Supply chain finance
– Trade finance
– Extending letter of credit facilities and bank guarantee
– Project finance and advisory services
– Lease finance
– Gold banking through dedicated bullion branches
– Management of treasury operations
– Insurance and divestment services
– Advisory and consultancy services on various business operations

CORPORATE BANKING
OPERATIONS (Contd.)
 Credit Appraisal and Monitoring of Corporate
Loans
– The process of loan sanction, disbursement,
monitoring and follow-up is governed by corporate
loan policy issued by the individual banks
– Personnel working in these branches are specialised
and having expertise in respective industries
therefore lot of attention is given on quality of loans
and advances
– While evaluating the projects for different credit
requirements banks follow usual credit system

CORPORATE BANKING
OPERATIONS (Contd.)
 Policy Framework for Corporate Loans and Advances
– Preparing Policy Documents for Loans and Advances
• Types of credit facilities which could be considered to a
company or the firm
• Security norms for different kinds of loans including
collaterals
• Interest rate structures for different loans
• Delegation of powers at different levels of operations in a
bank
• Loan appraisals guidelines
• Loan documents to be obtained from a borrower and process
of creating charge on security

CORPORATE BANKING
OPERATIONS (Contd.)
– Preparing Policy Documents for Loans and Advances
• The guidelines regarding maximum exposure to an
individual borrower’s firm and MPBF for working capital
loans
• Loan sanction and appraisal mechanism
• Procedure for disbursement of loans at different intervals
• Loan application processing fee and other charges to be
levied to a borrower
• Guidelines for monitoring of a loan assets
• Strategies to be adopted in case of default and non-payment
of loan

CORPORATE BANKING
OPERATIONS (Contd.)
– Specialised Branches for Corporate Loans
• As per the RBI guidelines, banks have identified certain branches
specifically to manage corporate loans. These branches basically
deal with large borrowal accounts. This practice has been followed
to get expertise in corporate loans by the bank personal on the one
hand while on the other to provide effective and efficient service to
the corporate sector at one place
– Liaison with Other Banks
• In case the loan requirement to the corporate is for higher amount
and does not fall under the preview of one bank due to exposure
norms, a consortium is formed with the help of other’s banks to
diversify the risk therefore banks have proper monitoring and
follow-up arrangements with other banks

Chapter 6 commercial bank management .pptx

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Chapter 6 commercial bank management .pptx