\wA STUDY ON “MANAGEMENT OF LOAN ASSETS” IN OF PNB,

BHANGAGARH
A Summer Project Report submitted in partial fulfilment of the requirements for degree of
MASTER OF BUSINESS ADMINISTRATION
Under
ROYAL GLOBAL UNIVERSTY
Session : 2018-20

Prepared for
PUNJAB NATIONAL BANK, GUWAHATI, ASSAM, INDIA

Prepared by
Mr. Sidharth Suman
Roll no. ( )
Reg. No. (184031041)
Under the Guidance of Prof. : Dr. (CA) Manoj Jain ,RSB, Guwahati

Royal School of Business, Guwahati – 781035

Submitted On - _ _ / _ _ / 2019

Master Of Business Administration

Summer Internship Programme ( SIP)

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 Declaration

This is to declare that the Report titled “MANAGEMENT OF LOAN ASSETS” has been made
for the partial fulfilment of the course: summer Internship Program in the end of semester II
by me at PUNJAB NATIONAL BANK , Guwahati .

I confirm that this Report truly represents my work undertaken as a part of my Summer
Internship Programme (SIP). This work not replication of work done previously by any other
person. I also confirm that the contents of the Report and views contained there have been
discussed and deliberated with faculty guide .

Signature of the students :

Name of the Student : SIDHARTH SUMAN

Registration no. : 184031041

Master Of Business Administration

Certificate

This is to certify that Mr. Sidharth Suman , Reg. No. 184031041 has completed the report titled
“MANAGEMENT OF LOAN ASSETS” under my guidance for the partial fulfilment of the
course: Summer Internship Programme (SIP) in the end of semester II of the Master Of
Business Administration.

Signature of Faculty Guide:

Name of the Faculty Guide : DR. Manoj Jain

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 Master Of Business Administration

Certificate

This is to certify that Mr. Sidharth Suman , Reg. No. 184031041 has completed the report titled
“MANAGEMENT OF LOAN ASSETS” in “PUNJAB NATIONAL BANK” under my
guidance for the partial fulfilment of the course: Summer Internship Programme (SIP) in the
end of semester II of the Master Of Business Administration.

Signature of Organizational Guide :

Name of the organizational Guide :

Mr. Rajesh Kumar (Chief Mgr. CREDIT)

Master Of Business Administration

Preface

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This report deals with bank activities related to Loan Assets in PUNJAB
NATIONAL BANK . It include features, history, criteria for loan sanction,
managing the Non-Performing Assets and Recovery management, Board of
directors of bank, Product and Services of bank, demography of customers, etc.

Subject matters of this report has been elaborated with simple words and lucid.
Tables, charts figures have been given to facilitate under-standing.

Thus the have left no stone unturned to make this work useless, wasteful and
valueless. I gave my complete effort to make it valuable, useful and enrich it with
my views so that it give complete sense to readers.

ACKNOWLEDGEMENT

Every project big or small is successful largely due to the effort of a number of wonderful
people who have always given their valuable advice or lent a helping hand. I sincerely
appreciate the inspiration; support and guidance of all those people who have been instrumental
in making this project a success.
I, Sidharth Suman, the student of ROYAL GLOBAL UNIVERSITY (PGDM), am
extremely grateful to “PUNJAB NATIONAL BANK OF INDIA” for the confidence
bestowed in me and entrusting my project entitled “A study on Management Of Loan Assets
in Punjab National Bank of India, Guwahati Region with special reference to Corporate
loans” with special reference to PUNJAB NATIONAL BANK OF INDIA Head Office,
Bhangagarh , Guwahati.
At this juncture I feel deeply honoured in expressing my sincere thanks to my external mentor
“Mr. Rajesh Kumar” , Credit Manager for his cordial support, valuable information and
guidance, which helped me in completing this project through various stages.
I am obliged to staff members of Punjab National Bank of India Head office, Guwahati, for
the valuable information provided by them in their respective fields. I am grateful for their
cooperation during the period of my project.
I express my gratitude to “Placement Cell of RGU” for arranging the summer training in good
schedule. I also extend my gratitude to my project guide “ Professor DR. C.A. Manoj Jain” ,
who assisted me in compiling the project.
I would also like to thank all the faculty members of ROYAL GLOBAL UNIVERSITY for
their critical advice and guidance without which this project would not have been possible.
Last but not the least I place a deep sense of gratitude to my, my family members and my
friends who have been constant source of inspiration during the preparation of this project
work.

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 EXECUTIVE SUMMARY

The study of Loan Asset Management opens the portal for banks to minimise the
chance of losses, this study basically helps banks in the many possible ways by
implying in credit appraisal include pre-sanction and post-sanction controls and
measures which automatically detects the chances of any losses in future and
errors.

The study also helps in recovery mechanism of the banks sometime it's the
recovery process which have the lapses and clause, that causes the bank to burden
a loss, their can be many factors bases of these factors needs to be recognised.

The study will help these factor to be recognised and organised in the working
environment and able to extract and implied the optimal solution for that.

CONTENTS
CHAPTER I. INTRODUCTION
1.1 ORGANISATION OVERVIEW ……………………………………………….…………9
1.2 VISION AND MISSION…………………………………………………………………..14
1.3 HISTORY………………………………………………………………………………….15
1.4 PROFILE…………………………………………………………………………………..19
1.5 LOAN ASSET MANAGEMENT………………………………………………………….25
CHAPTER II. RESEARCH METHODOLOGY
2.1 OBJECTIVES………………………………………………………………………………29
2.2 RESEARCH METHODOLOGY……………………………………………………………30
2.3 LIMITATIONOF THE STUDY………………………………………………………….…30
CHAPTER III. CREDIT APPARISAL
3.1 CREDIT
APPRAISAL………………………………………………………………………….…….31

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3.2 STAGES OF CREDIT APPRAISAL………………………………………………….……32
3.3 CONTROL MEASURES FOR PRE-SANCTION APPRAISAL………………………….33
3.4 POST-SANCTION & FOLLOW UP OF LOAN ACCOUNT TO CONTROL NPA………51
CHAPTER IV. ANALYSIS
4.1 LAPSES IN LOAN ASSET MANAGEMENT………………………………………………74
4.2 RESTRUCTURE OF LOAN…………………………………………………………………78
4.3 RECOVERY MECHANISM…………………………………………………………………80
CHAPTER V. INSPECTION AND AUDITS
5.1 STATUATORY AUDIT AND RBI GUIDELINES……………………………………………87
5.2 INTERNAL AUDIT……………………………………………………………………………90
5.3 LFAR……………………………………………………………………………………………91
CHAPTER VI.
6.1 CONCLUSION………………………………………………………………………………….93
6.2 OBSERVATION………………………………………………………………………………..94
6.3 SUMMARY OF FINDINGS……………………………………………………………………95
6.4 SUGGESTIONS…………………………………………………………………………………96
6.5 BIBLIOGRAPHY………………………………………………………………………………..97

CHAPTER I
Introduction
1.1 ORGANISATION OVERVIEW

Punjab National Bank (PNB) is a state-owned commercial bank located in New Delhi. PNB is
one of the leading commercial banks in India. They offer banking products, and also operate
credit card and debit card business, bullion business, life and non-life insurance business, and
gold coins and asset management business. They are recognized as the bank offering highest
levels of customer satisfaction in Delhi and Chennai.
As on 31 December 2017, PNB's domestic branch network stood at 6,957 along with 9,598
ATMs. The bank has three overseas branches in Hong Kong, Dubai and Offshore Banking Unit
in Mumbai and Representative Offices (RO) at Dubai (UAE), Shanghai (China), Sydney
(Australia) and Dhaka (Bangladesh). The bank has two overseas subsidiaries viz. PNB
International Ltd. (UK) and Druk PNB Bank Ltd (Bhutan). The bank also has one associate
company viz. JSC Tengri Bank (Kazakhstan) and one Joint Venture Bank in Nepal i.e. Everest
Bank Ltd. The bank has got permission from RBI for opening Representative office in Yangon
(Myanmar).
Punjab National Bank was incorporated in the year 1895 at Lahore, undivided India. The Bank
has the distinction of being the first Indian bank to have been started solely with Indian capital.
In the year 1940, the Bank absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi
circle. In the year 1951, they acquired the 39 branches of Bharat Bank and in the year 1961,
they acquired Universal Bank of India.
Punjab National Bank was nationalised in July 1969 along with 13 other banks. In the year
1986, they acquired Hindustan Commercial, which added Hindustan's 142 branches to the
Bank's network. In the year 1993, they acquired New Bank of India which the GOI. During the
year 1996, they developed a packaged for corporate customers for fast remittance of funds from
different up-country branches. In the year, they set up a representative office in Almaty,
Kazakhstan.
In the year 2000, the Bank has introduced a scheme for providing finance against mortgage of
immovable property. In September 2000, they commenced their gold business in the form of

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Gold Import Scheme. In November 2000, they launched an International Co-branded Credit
Card of Punjab National Bank and Hongkong & Shanghai Banking Corporation (HSBC) in
New Delhi.

In March 2002, the Bank came out with their first Initial public offer (IPO) for 5,30,60,700
equity shares of Rupees 10 each which resulted in the reduction of the government's
shareholding in the Bank. During the year 2002, they started their branch in M.G. Road,
Bangalore named as Mid-Corporate Branch (MCD) to provide their corporate clients with a
credit limit of Rupees 3.5 crore and above. They made joint venture with Infosys for the
implementation of a Centralized Banking Solution for them. Also, they made a tie up with
Cisco Systems for networking 3,870 branches as part of their Rupees 150 crore plan.
In the year 2003, the Bank took over Kozhikode-based Nedungadi Bank Ltd (NBL). The Bank
entered into an alliance with New India Assurance for selling their general insurance products.
Also, they opened a representative office in London. During the year, PNB Capital Service Ltd
was amalgamated with the Bank.
In June 2003, the Bank entered into an MoU with Principal Financial Services Inc (USA) and
Vijaya Bank for joint venture partnership in Life Insurance, Pensions and Asset Management
(MF) business. Also, they formed a strategic alliance with Infrastructure Leasing and Financial
Services Ltd (IL&FS) for setting up a private equity fund for investing in domestic companies

In the year 2004, the Bank acquired the assets of Hindustan Transmission Product Ltd. They signed a
corporate agency agreement with Export Credit Guarantee Corporation of India Ltd (ECGC) for
marketing ECGC's export credit insurance products through the network of the bank's branches. Also,
an MoU was signed with Intel for the deployment of various IT-related solutions.

During the year, the Bank signed an MoU with ICICI Bank for ATM network sharing. They awarded
a project to Tata Consultancy Services (TCS) for implementing human capital management and
payroll solution. They established a branch office in Kabul, Afghanistan. Also, they opened a
representative office in Shanghai. The bank established an alliance with Everest Bank in Nepal that
permits migrants to transfer funds easily between India and Everest Bank's 12 branches in Nepal.

In the year 2005, the Bank unveiled ATM at Edappal. Also, they opened a representative office in
Dubai. In the year 2006, the Bank made a tie up with MasterCard International to launch a signature-
based debit card. Also, they made a tie up with Indian Airlines for online booking of air tickets. They
opened a new branch in Uttarakhand. In October 2007, the Bank entered into MoU with India
Infrastructure Finance Company with an aim to extend their cooperation and support to IIFC in areas
of creating a deal flow of infrastructure projects. In January 2008, the Bank commenced commercial
banking operations in Hong Kong.

During the year 2008-09, the Bank opened 168 branches, out of which 90 are new branches and 78
branches was added through upgradation of Extension Counters. They made collaboration with LIC
for selling insurance policies and also made a tie up with Oriental Insurance for selling non-life policies
on a referral basis. In June 2008, they entered into an MoU with ILFS Cluster Development Initiative
Ltd for providing finance for various industrial infrastructure projects in the country.

In September 2008, they signed an MoU with SMC Global Securities Ltd and Net worth Stock Broking
Ltd for providing online trading facility to Company's customers. They offered a unique '3 in 1 account'
comprising of Saving, Demat and Trading account. In February 2009, they commercially launched

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their credit cards with 2 types of consumer credit cards, namely Gold and Classic. Also, they entered
into an agreement with Oriental Insurance Company to market insurance products, a practice also
known as bancassurance.

In March 2009, the Bank entered into an understanding with Tata Motors for financing entire range of
passenger cars. Also, they executed an agreement with The Life Insurance Corporation of India for
bancassurance, life insurance under the provisions of IRDA's Referral Arrangement.

During the year 2009-10, the Bank opened 524 domestic branches, out of which 347 are at new
locations while 177 branches was added through upgradation of existing Extension Counters. They
deployed 1400 ATMs taking the the total count of ATMs to more than 3500 Nos. They opened two
overseas branches 1 in Hong Kong and another at DIFC Dubai and started a JV banking subsidiary
'DRUK PNB Bank Ltd' in Bhutan. Also, they opened a representative office in Oslo, Norway.

During the year, the Bank sold 6.5% of their stake in UTI Assets Management Co Ltd and UTI Trustee
Pvt. Ltd, thus bringing down their stake in both these companies to 18.5%. They launched Corporate
Credit Card with Individual liability. Also they launched Merchant Acquiring Business through
installation of Point of Sale (PoS) Terminals at Merchant Establishments and Internet Payment
Gateway by integrating through Merchant Website, with Brand Name PNB Biz.

In May 2009, the Bank incorporated a subsidiary company namely PNB Investment Services Ltd. In
November 2009, they entered into an agreement with FIM Bank (Malta), Banca IFIS, Italy and Blend
Financial Services Ltd, Mumbai for setting up a joint venture company for providing factoring,
forfeiting and trade finance related business.

During the year 2010-11, the Bank introduced new set of products and services such as PNB Uphaar,
PNB Suvidha and World Travel Card. In December 13, 2010, they acquired 63.64% stake in JSC Dana
Bank of Kazakhstan. In January 12, 2011, the Bank's joint venture India factoring and Finance
Solutions Pvt. Ltd started its commercial operations from Delhi, Mumbai & Chennai.

The total number of branches at the end of March 2011 rose to 5189. The branch network comprises
2047 Rural, 1154 Semi Urban, 1111 Urban and 877 Metropolitan branches. During the review period
210 domestic branches were opened. With 5189 branches, including 28 Extension Counters, the Bank
has the largest network amongst the nationalized banks. As part of customer segmentation, Bank has
opened specialized Branches that include 6 Micro Finance branches, 59 SME branches, 11
International Banking Branches, 17 Asset Recovery Management Branches, 13 Mid Corporate
Branches, 11 Large Corporate Branches, 73 Retail Asset Branches, 11 Agriculture Finance Branches,
3 high-tech agriculture branches, 1 Capital Market Services Branch and 1 International Service
Branch. Besides, 41 Back Offices, 2 Special Foreign Exchange Offices, 17 Special MICR Centre, 41
Service (Regional Clearing Centre) Centre, 4 Financial Inclusion Service Centre, 3 Centralized Draft
Payable Centre, 1 Central Clearing Service Centre and 1 Depository Back Office are established to
reduce delivery time and improve response time.

On 5 March 2010, PNB announced that the bank has received permission from RBI for setting up a
representative office in Sydney, Australia.

On 13 December 2010, PNB announced that the bank has completed the transaction for acquisition of
63.64% stake in JSC Dana Bank Kazakhstan. PNB has acquired 35 million shares of 1000 Tenge each,
at par, for 3.5 Bn. Tenge (USD 23.765 million approx.), which has raised the capital of JSC Dana Bank
to the level of 5.5 Bn. Tenge from the existing 2 Bn. Tenge.

8
On 12 January 2011, PNB announced that it has bought Principal Financial Group of Mauritius (PFG)
and U K Paints stake of 26% and 32% respectively in Principal PNB Life Insurance Company Ltd.
After the transaction, the bank's stake in Principal PNB Life Insurance Company Ltd stands at 88%.
PNB also said at that time that it will continue to support Principal PNB Asset Management Company
Pvt. Ltd for a period of three years.

On 15 February 2011, PNB announced that the bank has entered into an arrangement with Weizmann
Forex Ltd., Mumbai (Principal Agent) for handling inward remittances under MTSS (Money Transfer
Service Scheme) through Western Union. The bank also entered into an arrangement with BFC Forex
& Financial Services Ltd., Thane (Maharashtra) for handling inward remittances under MTSS (Money
Transfer Service Scheme) through the web based product Ez. Remit.

On 28 April 2011, PNB announced the issue and allotment of 15.09 lakh equity share at issue price of
Rupees 1218.82 per equity share to Government of India on preferential basis aggregating Rupees 184
crore.

On 28 March 2012, PNB announced that upon receipt of allotment money of Rupees 1589.90 crore
from Life Insurance Corporation of India (LIC), the bank has allotted 1.58 crore equity shares at issue
price of Rupees 1003.69 per share to LIC on preferential basis. On 2 April 2012, PNB announced that
upon receipt of allotment money of Rupees 654.99 crore from Government of India, the bank has
allotted 65.25 lakh equity shares at issue price of Rupees 1003.69 per share to Government of India on
preferential basis.

On 16 January 2013, PNB announced that the bank has acquired 30% stake in Metlife India Insurance
Co. Ltd.

On 6 March 2013, PNB announced that upon receipt of allotment money of Rupees 1247.99 crore
from Government of India on 4 March 2013, the bank has allotted 1.42 crore equity shares at issue
price of Rupees 873.05 per share on preferential basis to Government of India.

On 28 October 2013, PNB announced that the Chairman & Managing Director of the bank, as per
authority delegated by the Board, has approved issuance of equity shares of face value of Rupees 10
each for an amount upto Rupees 500 crore, at such price as may be decided as per SEBI (ICDR)
Regulations, 2009, on preferential basis in favour of Government of India, subject to necessary
approvals.

On 4 March 2014, PNB announced that the bank has sold its entire stake in Credit Information Bureau
India Ltd. (CIBIL) to TransUnion International Inc. (FII). On 1 April 2014, PNB announced that it has
sold its entire 30% stake in India Factoring & Financial Solutions Ltd. (IFFSL) to parent promoter FII
(FIM Bank (Malta) and realized Rupees 107.83 crore. On 4 July 2014, PNB announced that it has sold
41% stake in High Mark Credit Information Services Ltd. (High Mark) to CRIF and realized Rupees
4.15 crore.

The Board of Directors of PNB at its meeting held on 19 September 2014 granted in-principle approval
for sub-division of existing equity shares of face value of Rupees 10 each into 5 equity shares of face
value of Rupees 2 each.

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On 1 April 2015, PNB announced that capital funds to the tune of Rupees 870 crore have been received
from the Government of India on 31 March 2015 for issue and allotment of 4.42 crore equity shares at
a price of Rupees 196.80 per equity share to Government of India on preferential basis in accordance
with Regulation 76(1) of SEBI ICDR Regulations.

On 30 September 2015, PNB announced that consequent upon receipt of capital funds to the tune of
Rupees 1732 crore from the Government of India on 29 September 2015, the bank has issued and
allotted 10.9 crore equity shares at a price of Rupees 158.84 per equity share on preferential basis to
Government of India in accordance with Regulation 76(1) of SEBI ICDR Regulations.

On 15 September 2016, PNB announced that consequent upon receipt of capital funds to the tune of
Rupees 2112 crore from the Government of India on 14 September 2016, the bank has issued and
allotted 16.43 crore equity shares at a price of Rupees 128.49 per equity share on preferential basis to
the Government of India in accordance with Regulation 76(1) of SEBI ICDR Regulations.

Punjab National Bank (PNB) and India Post Payments Bank (IPPB) signed a memorandum of
understanding on 17 January 2017 wherein PNB shall provide technology platform for pilot launch of
IPPB on receipt of regulatory approval from Reserve Bank of India.

The Board of Directors of PNB at its meeting held on 2 November 2017 authorized the management
to partially sell its stake in PNB Housing Finance Ltd. Further, consequent upon the exercise of call
option by the Principal Group, the Board has approved to offload PNB's entire stake in Principal PNB
Asset Management Company and Principal trustee Company Pvt. Ltd to the Principal group.

On 5 December 2017, PNB announced that the bank successfully sold 98.15 lakh equity shares of PNB
Housing Finance Ltd (PNBHFL) to different investors (Non Retail and retail) at above the floor price
/cut off price, with gross sales consideration of Rupees 1315.33 crore.

On 18 December 2017, PNB announced allotment of 29.76 crore equity shares to successful eligible
qualified institutional buyers at a price of Rupees168 per share. Earlier, PNB on 14 December 2017
announced the closure of the qualified institutions placement (QIP) of equity share. The bank raised
Rupees 5000 crore from the QIP.

The Board of the Directors of PNB at its meeting held on 6 February 2018 accorded approval for
Capital Infusion by Government of India up to Rupees. 5473 crore.

On 14 February 2018, PNB informed the stock exchanges of detection of a massive fraud of Rupees
11394.02 crore. On 12 February 2018, on the basis of investigation report, total fraud of Rupees
11394.02 crore (about USD 1771.69 million) in case of unauthorized issuance of Letters of
Undertakings, Foreign Letter of Credits and Inland Letter of Guarantees in the group accounts of Nirav
Modi Group and M/s Gitanjali Group and in the account of M/s. Chandri Paper & Allied Products Pvt.
Ltd. was reported to RBI. Later, on 26 February 2018, PNB informed the stock exchanges that the
quantum of reported unauthorized transactions can increase by about USD 204.25 million.

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 1.2 VISION AND MISSION

VISION 2018

Vision Document envisages realistic, credible & attractive future business plan for an
organization. It also provides rationale for the mission and the goals, the organization should
pursue in pursuit of the Vision. A Vision must be consistent with the organization's values and
culture, and its place in its environment.

The new Vision 2018 document is the policy document of bank for a period ending March
2018. The “Vision 2018” is a record of the emerging business opportunities & challenges in
the banking landscape in general and for bank in particular. It presents estimated business goal
for bank till 2018 and sketches out a Planning to enable bank accomplish the goal. Vision 2018
charts a road map for our Bank to achieve “Profitable Growth from the Grassroots”. It is also
envisioned that Bank will strive for Digitalization of operations to efficiently serve the Gen
Next Customers.

VISION AND MISSION STATEMENT

VISION OF THE BANK

"To position PNB as the 'Most Preferred Bank' for customers, the 'Best Place to Work In' for
employees and a 'Benchmark of Excellence' for the industry".

MISSION OF THE BANK

"Creating Value for all its customers, Investors and Employees for being the first choice for
all stakeholders".

1.3 HISTORY

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 ORIGIN

Punjab under the British especially after annexation in 1849 witnessed a period of rapid development
giving rise to a new educated class fired with a desire for freedom from the yoke of slavery. Amongst
the cherished desires of this new class was also an overriding ambition to start a Swadeshi Bank with
Indian Capital and management representing all sections of the Indian community. The idea was first
mooted by Rai Mool Raj of Arya Samaj who, as reported by Lala Lajpat Rai, had long cherished the
idea that Indians should have a national bank of their own. He felt keenly "the fact that the Indian
capital was being used to run English banks and companies, the profits accruing from which went
entirely to the Britishers whilst Indians had to contend themselves with a small interest on their own
capital".

At the instance of Rai Mool Raj, Lala Lajpat Rai sent round a circular to selected friends insisting on
an Indian Joint Stock Bank as the first special step in constructive Swadeshi. Lala Harkrishan Lal who
had returned from England with ideas regarding commerce and industry, was eager to give them
practical shape.

'PNB was born on May 19, 1894. The founding board was drawn from different parts of India
professing different faiths and a varied back-ground with, however, the common objective of providing
country with a truly national bank which would further the economic interest of the country.

The Bank opened for business on 12 april, 1895. The first Board of 7 Directors comprised of Sardar
Dayal Singh Majithia, who was also the founder of Dayal Singh College and the Tribune; Lala
Lalchand one of the founders of DAV College and President of its Management Society; Kali Prosanna
Roy, eminent Bengali pleader who was also the Chairman of the Reception committee of the Indian
National Congress at its Lahore session in 1900; Lala Harkishan Lal who became widely known as
the first industrialist of Punjab; EC Jessawala, a well known Parsi merchant and partner of Jamshedji
& Co. of Lahore; Lala Prabhu Dayal, a leading Rais, merchant and philanthropist of Multan; Bakshi
Jaishi Ram, an eminent Civil Lawyer of Lahore; and Lala Dholan Dass, a great banker, merchant and
Rais of Amritsar. Thus a Bengali, Parsi, a Sikh and a few Hindus joined hands in a purely national and
cosmopolitan spirit to found this Bank which opened its doors to the public on 12th of April 1895.
They went about it with a Missionary Zeal. Sh. Dayal Singh Majithia was the first Chairman, Lala
Harkishan Lal, the first secretary to the Board and Shri Bulaki Ram Shastri Barrister at Lahore, was
appointed Manager.

A Maiden Dividend of 4% was declared after only 7 months of operation. Lala Lajpat Rai was
the first to open an account with the bank which was housed in the building opposite the Arya
Samaj Mandir in Anarkali in Lahore. His younger brother joined the Bank as a Manager.
Authorised total capital of the Bank was Rupees 2 lakhs, the working capital was Rupees
20000. It had total staff strength of nine and the total monthly salary amounted to Rupees 320.
The first branch outside Lahore was opened in Rawalpindi in 1900. The Bank made slow, but
steady progress in the first decade of its existence. Lala Lajpat Rai joined the Board of Directors
soon after. in 1913, the banking industry in India was hit by a severe crisis following the failure

12
of the Peoples Bank of India founded by Lala Harkishan Lal. As many as 78 banks failed during
this crisis. Punjab National Bank survived. Mr. JH Maynard, the then Financial Commissioner,
Punjab, remarked...."Your Bank survived...no doubt due to good management". It spoke
volumes for the measure of confidence reposed by the public in the Bank's management.

The years 1926 to 1936 were turbulent and loss ridden ones for the banking industry the world
over. The 1929 Wall Street crash plunged the world into a severe economic crisis.

It was during this period that the Jaliyanwala Bagh Committee account was opened in the Bank,
which in the decade that followed, was operated by Mahatma Gandhi and Pandit Jawaharlal
Nehru. The five years from 1941 to 1946 were ones of unprecedented growth. From a modest
base of 71, the number of branches increased to 278. Deposits grew from Rupees 10 crores to
Rupees 62 crores. On March 31, 1947, the Bank officials decided to leave Lahore and transfer
the registered office of the Bank to Delhi and permission for transfer was obtained from the
Lahore High Court on June 20, 1947.

PNB was then housed in the precincts of Sri Niwas in the salubrious Civil Lines, Delhi. Many
a staff member fell victim to the widespread riots in the discharge of their duties. The conditions
deteriorated further. The Bank was forced to close 92 offices in West Pakistan constituting 33
percent of the total number and having 40% of the total deposits. The Bank, however, continued
to maintain a few caretaker branches.

The Bank then embarked on its task of rehabilitating the displaced account holders. The
migrants from Pakistan were repaid their deposits based upon whatever evidence they could
produce. Such gestures cemented their trusts in the bank and PNB became a symbol of Trust
and a name you can bank upon. Surplus staff posed a big problem. Fast expansion became a
priority. The policy paid rich dividends by opening up an era of phenomenal growth.

In 1951, the Bank took over the assets and liabilities of Bharat Bank Ltd. and became the
second largest bank in the private sector. In 1962, it amalgamated the Indo- Commercial Bank
with it. From its dwindled deposits of Rupees. 43 crores in 1949 it rose to cross the Rupees 355
crores mark by the July 1969. Its number of offices had increased to 569 and advances from
Rupees 19 crores in 1949 to Rupees 243 crores by July 1969 when it was nationalized.

Since inception in 1895, PNB has always been a "People's bank" serving millions of people
throughout the country and also had the proud distinction of serving great national leaders like
Sarv shri Jawahar Lal Nehru, Gobind Ballabh Pant, Lal Bahadur Shastri, Rafi Ahmed Kidwai,
Smt. Indira Gandhi etc. amongst other who banked with us.

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 FOUNDING FATHER : PUNJAB KESHARI LALA LAJPAT RAI

LIFE OF LALA LAJPAT RAI

There are few leaders of the pre-independence era who, after having plunged themselves into
the political struggle, continued to take an active interest in social, cultural and educational
work. Lala Lajpat Rai was one of such leaders. Born on 28th January, 1865 at a small village,
Dhudike in the Ferozepur district of Punjab, he belonged to the Agarwal Baniya caste and it
was perhaps because of this, in addition to taking part in social and political life of the country,
he took keen interest in industrial and financial matter also. His father was a teacher of Persian
and Urdu in a government school.

Having passed the final examination in Law from Punjab University, he started his practice
in1883, when he was barely 18 years old. Endowed with a rich legacy of moral and intellectual
background, Lala Lajpat Rai had benefit of education in the practical rationalism of western
science combined with the religious purity and moral elevation of Eastern literature that put on
him the hallmark of true culture. While sympathizing with and aiding every movement made
for progress, Lala Lajpat Rai identified himself very closely with Arya Samaj, in which he
found ample scope for the exercise of his patriotism, philanthropy and religious zeal.

Having qualified as a pleader, Lala Lajpat Rai started practice at Hissar and soon became a
leading lawyer of the district. He organized the Arya Samaj there and put it on proper lines. In
1892, he transferred his practice to the wider field at Lahore.Education, both secular and
religious, was in Lala Lajpat Rai’s view an important factor in national development. He took
part in the foundation of the D.A.V. College at Lahore.

14
LALA LAJPAT RAI AND PUNJAB NATIONAL BANK

Lalaji was keenly concerned with the fact that though Indian capital was being used to run
English Banks and companies, the profits went entirely to the British, while Indians had to
contend themselves with a small interest on their capital. He echoed this sentiment in one of
his writing while concurring with Rai Mul Raj of Arya Samaj who had long cherished the idea
that Indians should have a National Bank of their own. At the instance of Rai Mul Raj, Lala
Lajpat Rai sent a circular to selected friends insisting on an Indian joint stock Bank as the first
step in constructive Swadeshi and the response was satisfactory After filing and registering the
memorandum and Articles of Association on 19 May, 1894, the bank was incorporated under
Act VI of the 1882 Indian Companies Act.

The prospectus of the bank was published in the Tribune, and the Urdu Akhbar-e-Am and
Paisa Akhbar. On 23rd May, 1894, the founders met at the Lahore residence of Sh. Dyal Singh
Majithia, the first Chairman of PNB, and resolved to go ahead with the scheme. They decided
to hire a house in the famous Anarkali Bazar of Lahore opposite the post office and near well
known stores of Rama Brothers.On 12th April 1895, the Bank opened for business, a day before
the great Punjab festival of Baishakhi. The essence of the Bank’s culture was clear at this first
meeting itself. The fourteen original

shareholders and seven directors took only a modest number of shares; the control of the Bank
was to lie with the large, dispersed shareholders, a purely professional approach that was as
uncommon then as it is today.

1.4 PROFILE
Board of Directors

Non-Executive Chairman Managing Director and CEO

15
Shri Sunil Mehta Shri Sunil Mehta

Executive Directors

Dr. Rajesh Kumar Sh Lingam Venkata Sh Agyey Azad

Yaduvanshi Prabhakar

Directors

16
 Shri Pankaj Jain

Shri Sanjay Verma

(Govt. of India Nominee Director) (Shreholder Director)

Shri Vivek

Aggarwal Dr. Asha Bhandarker

(Reserve Bank of India Nominee Director) (Shareholder Director)

PROFILE
Punjab National Bank, India’s first Swadeshi Bank, commenced its operations on April 12,
1895 from Lahore, with an authorised capital of Rupees 2 lac and working capital of Rupees

17
20,000. The far-sighted visionaries and patriots like Lala Lajpat Rai, Mr. E C Jessawala, Babu
Kali Prasono Roy, Lala Harkishan Lal and Sardar Dyal Singh Majithia displayed courage in
giving expression to the spirit of nationalism by establishing the first bank purely managed by
the Indians with Indian Capital

AWARDS AND RECOGNITION

The Bank has earned many laurels and accolades in different areas. To name a few, PNB was
the only Bank amongst Public Sector Banks to receive ‘IBA Banking Technology Award’
under ‘Best Risk Management Initiatives’. The Bank was awarded with ‘Agriculture
Leadership Award 2015’ by Agriculture Today Group, thereby adding another feather in the
cap of the Bank’s achievement. Other major awards received during the year are ‘National
Education Excellence Award (NEEA) 2015’ for Excellent Contribution in advancing
Education Loans to Students by ‘Federation of Industry Trade & Services (FITS)’; ‘Best Public
Sector Bank under Priority Sector Lending’ by Dun & Bradstreet and ‘Golden Peacock
Business Excellence Award’ by Institute of Directors. Further, the Bank was recognized as the
‘Most Valuable Indian Brand’ amongst nationalized banks by Millward Brown (leading global
research agency) and WPP (World’s largest communication services group). Globally, the
Bank improved its ranking from 190th in 2014 to 174th in 2015 in ‘The Banker’s Top 1000
World Banks’.

BUSINESS PERFORMANCE
During the long history of over 120 years of the Bank, 7 banks have merged with PNB and it
has become stronger and stronger with a network of 6635 branches and 8622 ATMs as on 30th
Sept’15. Today the Bank stands tall amongst nationalized banks in major financial parameters
i.e., Domestic Business, Domestic Deposits, Domestic Advances, CASA Deposits and Savings
Deposits. The performance highlights of the Bank in terms of business and profit are shown
below:

18
 Rupees. In Crore.

PARAMETERS MAR”11 MAR”12 MAR”13 MAR”14 MAR”15 SEP”14 SEP”15

(HY) (HY)
DEPOSITS 312889 379588 391560 451397 501379 473511 539924

ADVANCES 242107 293775 308796 349269 380534 357093 380958

TOTAL 554996 673363 700356 800666 881913 830604 920882

BUSINESS

OPERATING 9056 10614 10907 11384 11955 6001 6071

PROFIT

NET PROFIT 4433 4884 4748 3343 3062 1980 1342

The Bank’s Global Business has crossed the milestone of Rupees 9.20 lakh crore as at end of
Sept’15. On the liability side, the Bank’s CASA Deposits at Rupees 1,94,546 crore constitutes
40.23% of Domestic Deposits which is one of the highest amongst nationalized banks. On
credit side, the Bank has placed a special focus on retail, MSME and agriculture sectors. This
is evident from the fact that Retail credit and MSME credit grew by 23% and 17.6% on YoY
basis respectively as on 30th Sept’15.

In terms of key financial ratios, Domestic Net Interest Margin stood at 3.37% during Q2 FY16
which is one of the highest amongst nationalized banks during Q2 FY’16. Further, Cost of
Deposits of the Bank reduced from 6.12% in H1 FY’15 to 5.97% in H1 FY’16. The Bank’s
Cost of Funds too declined from 5.12% in H1 FY’15 to 5.03% in H1 FY’16. The Bank is well
capitalized with the Capital to Risk Weighted Assets Ratio (CRAR) at 12.20% and Tier I
capital at 9.36% as per Basel III.

FINANCIAL INCLUSION
Financial Inclusion has been a priority area for the Bank as reflected in its mission "Banking
for the Unbanked”. This is evident from the fact that the Bank actively participated in the
various schemes launched by the Government. The Bank successfully completed the first phase
of Pradhan Mantri Jan Dhan Yojana (PMJDY) and opened 1,16,96,385 accounts as on 30th

19
Sept’15. The Bank has also issued 99,67,026 RuPay cards under PMJDY. The amount
th
mobilized through these accounts touched a level of Rupees 1061 crore as on 30 Sept’15.

The Bank has enrolled around 62.74 lakh people under the three social security schemes i.e,
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana
(PMSBY) and Atal Pension Yojana (APY). The Bank has tied up with Life Insurance
Corporation of India for implementation of PMJJMY and with Oriental Insurance Company
for PMSBY. Further, the Bank has been approved by PFRDA as aggregator for implementation
of APY.

The Bank undertook lot of Financial Literacy campaigns to educate customers on various
banking facilities across the country with the help of its well defined institutional structure in
the form of 56 PNB Rural Self Employment Training Institutes, 108 Financial Literacy Centres
and 10 Framers’ Training Centres. Further a documentary film named ‘VARDAAN’ was
screened in rural areas to create awareness about the Bank’s various schemes.

MSME
To give boost to the MSME business, the number of MSME Credit Growth Initiative branches
has increased to 357 as on 30th Sept’15. This initiative proposes to reduce turnaround time and
to grow MSME portfolio by 30% on YoY basis. Apart from this, the Bank has adopted 55
clusters to give focused attention to this sector. These initiatives have resulted in 17.61% YoY
growth in MSME credit which stood at Rupees 87981 crore as at the end of Sept’15.

Under Pradhan Mantri Mudra Yojana (PMMY), the Bank has opened 179700 accounts under
all categories and disbursed Rupees 877.14 crore as on 30.09.2015. The Bank has also launched
MUDRA card on 10.07.2015 for providing hassle-free working capital to the micro enterprises.

CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility (CSR) is an integral part of corporate business strategy of the
Bank. The Bank is promoting welfare of people living in rural and semi urban areas as a part
of its CSR activity. Under PNB VIKAS which is a Village adoption scheme to develop the
villages in an holistic manner, the Bank has adopted.

20
 1.5 LOAN ASSET MANAGEMENT

The Loans Management - Business Operations ES bundle is a means of enabling financial

institutions to perform business operations during the lifecycle of a loan, such as creation of
the loan, disbursement of funds, allowing customers to skip a payment or payoff a loan fully.
An installment loan is a standardized short- or mid-term loan product, which is typically used
to finance consumer-related products for private customers. It could also be used to finance
investment goods for small enterprises. A mortgage loan is a standardized mid- or long-term
loan product which is typically used to finance any purpose related to real estates, i.e. building
a new single family house or buying an apartment.
Following examples are given as example on the usage of a installment loans.
As soon as bank and customer have agreed about the installment loan contract the loan creation
is initiated and the loan capital is disbursed as soon as all preconditions, i.e. collaterals, are
fulfilled. Usually the customer repays the installment loan in equal monthly installments
including interest and principal, but other repayment schemes are also possible (for example,
adjustable installments or balloon payments at end of the loan term). Because of a liquidity
shortage in a manageable time frame the customer might also ask to skip some payments.
The enterprise services in the Loans Management - Business Operations ES bundle allow banks
to create loan contracts, disburse capital from a loan, offer skip payment functionality as a way
of marketing their loan products and initiate the payoff of a loan.
In the first use case a customer and the bank agree about a new loan contract. The customer
consultant enters the contract data into his front office application so that the loan contract is
created in the backend system.
In the second use case the customer will request a disbursement from the loan to be transferred
to his bank account. A loans manager will go into the system to pull up the customer's account
details, and then run a series of steps to find out the amount which can be disbursed. The loans
manager can select due items such as fees or interest payments to be deducted from the gross
amount being requested for disbursement in order to calculate the net loan disbursement.
In the third use case the customer asks to change the current payment plan as he would like to
increase the monthly installment rate The loans officer can go into the system , read the details
on the current loan, specify when the next payment will be due, and perform the payment plan
change.
In the fourth use case the customer received unexpected money and the bank agrees that he can
make an early payoff. The loan manager accesses the system and specifies which amount the
customer has to pay to payoff the loan completely. The loan manager initiates the required
steps in the system.

21
The Loans Management - Business Operations ES bundle leverages enterprise SOA through
enterprise services that communicate with SAP for Banking using the Business Process
Platform (BPP) for Banking.

THE CREDIT INITIATION AND ANALYSIS PROCESS OF

CORPORATE LOANS

The objective of the credit initiation and analysis process is to ensure that loans extended by
the bank meet credit policy guidelines and that credit standards and procedures established in
the credit policy are observed in all geographic areas where the bank is active. The credit
policy, updated periodically as necessary, should clarify what types of loans are acceptable to
the bank, what loan purposes, tenor, collateral, structure, and guarantees the bank will accept
in its lending activities. In other words, the credit policy establishes threshold requirements
that any prospective borrower must meet.

The credit initiation and analysis process should follow a typical diagnostic process flow,
beginning with screening of potential customers and data collection, followed by identification,
analysis and measurement of risks, and then moving to a series of specific risk evaluation and
risk mitigation actions in preparing for a credit decision,

CREDIT INITIATION & ANALYSIS PROCESS

Screen prospective Collect data for Analyse risks

customers in order to analysis of risks associated with
identify highest quality associated with prospective customers
prospects prospective customers

Using risk analysis as the

Prepare well-documented basis, structure proposed
credit analysis package credit facilities to
maximize profit and
minimize potential losses
CREDIT UNDERWRTING

22
Credit underwriting is the process that banks undertake to structure a credit facility to
minimize risks and generate the best return, given the risks that the banks assume. The credit
structure includes the term of the loan, collateral required, amortization requirement, timing
of interest payments, and reporting requirements.

Best underwriting practices include protections for the bank to mitigate the risks and increase
the likelihood of loan repayment. Such protections include verification of cash flow to meet
loan servicing requirements, proper loan covenants to preserve borrower strengths and limit
weaknesses, and the requirement for sufficient, verified collateral and/or guarantees to
provide a secondary or even tertiary repayment source.

Underwriting also includes the reporting required of the borrower during the life of the loan.
The higher the risk identified in the credit, the more information will be required and the
greater the frequency of the information. This reporting forms the basis of post-disbursement
loan monitoring.

The structure of the loan is based on the analysis of the four credit foundations and should be
approved in accordance with the credit authorities and approval procedures established in the
credit policy.
The credit approval should also include confirmation of the borrower’s credit risk rating and
requirements for monitoring proposed by the credit officer. The higher the risk, the more
stringent the monitoring requirements should be. For example, monthly rather than quarterly
financial statements might be required.

Loan disbursement should occur once all required documents have been signed and delivered
to the bank. The loan documents comprise the bank’s primary protection once the loan has
been disbursed. If they are not in perfect order, there is potential for problems until the loan is
repaid.

The loan agreement, a legal document binding both parties, is the key document for the
lender. It should be designed to “control” the borrower and contain protections for the bank.
These protections include such items as conditions under which the bank will make funds
available and covenants to ensure that borrower strengths are preserved and weaknesses are
contained. The strengths and weaknesses should have been clearly identified earlier in the
credit process, quantified and then reflected in the loan agreement to mitigate the lender’s
risk and exercise control.

The loan agreement becomes the primary monitoring tool for the lender, as it contains all of
the requirements that the borrower must fulfil until the loan has been repaid in full.
Generally, each bank will have its own loan template that is modified to fit the particular

23
borrower circumstances. In the case of large, complex credits, the lender may work with the
bank’s internal legal department or even outside counsel, in order to ensure that the loan
agreement contains all possible protections for the bank.

CHAPTER 2
REVIEW OF LITERATURE : I

Topic : Management of NPA in the Commercial Banks in Odisha: An Empirical Analysis

24
Publisher: International Journal of Scientific and Research Publication
Author: Dr Tanmaya Kumar Pradhan
Published Date: September, 2012
Volume: Volume 2, Issue 9

Objective:
1) To study Bankers opinion on cause of NPA.
2) To analyze the steps to be taken to control NPA.
3) To examine the norms of the bank for loan processing.
4) To study bankers views on recovery of dues.

Research Methodology:
The necessary data and information has been collected on the basis of Primary data.

Findings:
(a) On the demand side mismanagement or diversion of funds,willful default and flaws
in the legal system accounts for NPA.
(b) 92% of Banks Officer’s prefer out of court settlement than taking legal acyions
defaulters, as the matter takes a long time and NPA grows further than getting
resolved.
(c) Solutions for checking NPA lie in caution and care during loan processing,
strengthening of recovery efforts, monitoring of performing assets, Out of court
settlement etc. 21.92% of banks stress on proper assessment of technical & financial
viability of project before granting loans for the same.
(d) Large borrowers are found to be the principal defaulters.
(e) The percentage of willful defaulters was found to be 82%.

REVIEW OF LITERATURE : II

25
REVIEW OF LITERATURE : III

Topic : A Study of NPA of Public Sector Bnaks in India

Publisher: IOSR Journal of Business and Management(IOSR-JBM)
Author: Sulagna Das, Abhijit Dutta
Published Date: November, 2014
Volume: Volume 16, Issue 11

Objective: The objective of the study is to find out whether there is any difference in NPA
occurrence between the various banks during the period of the study.

Research Methodology: The study is done based on secondary data , which is obtained
from published reports of RBI and other articles and journal.

Findings: NPA are the types of assets which are the subject of major concerns to the
banking sector and the other non-banking financial institutions. A loan or lease that does not
meet the stated principal amount and the interest amount payments is termed as non-
performing assets. Th e current study deals with type of NPA and its causes as well as its
impact on the banking sector and the economy as a whole. A study was done on the State
Bank of India and its associates, and the other public sector banks, based on the secondary
data, from the annual reports, of 6year starting from 2008 to 2013. An attempt is made to
analyze the data, through statistical tool, ANOVA.
The main objective of the study was to find out whether there is any difference in the
NPA occurrence between the various banks during the period of the study. The study finds
out thet there is no significant difference between the means of NPA of the banks at five
percent level of significance. Hence one can safely conclude that banks irrespective of their
operations have similar NPAs in the recent years.

26
 CHAPTER - 2

2.1 OBJECTIVES :
The Primary Objective is to
1. To study the quality of loans disbursed to the selected borrower by the bank.
2. To study the level of compliance by the bank as per the term of sanction.
3. To study the follow up measures adopted by the Bank Branch for post-disbursement.
4. To Evaluate the Financial Report & Position of Bank Borrowers.
5. To Assess ALM System of the bank.

SCOPE OF THE STUDY

27
 2.2 RESEARCH METHODOGY

SURVEY AREA: GUWAHATI

SAMPLE DESIGN
A sample design is a definite plan for obtaining a sample from a given
population. It refers to the technique to the procedure adopted in selecting items
for the sampling design are as below :

SAMPLE SIZE
The Sample size has been taken 4 loan files, whose loan amount exceeds Rs. 1
crores from year (2018-19) and Population of those loan files were 17.

SAMPLING METHOD
Non-probabilty sampling technique of Convenience smpling.

2.3 DATA COLLECTION METHOD

Methodology is studying ways, this important part in report writing . Researcher should be
adopting good methodology in research. Actuality methods used the project by research as
below.
PRIMARY :
Primary sources of data includes Loan files of the customers form past two years(2018-19)
SECONDARY :
Depends upon the Listed Companies :-
NPA Master Circulars / Audit Report of CA.

28
 2.4 LIMITATION OF STUDY
Each and every study is followed by some limitation. This study too has some limitation
which is as follows :
1. Time constraint is one of the major factors of the study. It took more than two
months for the corporate work to accomplish.
2. The main sources of the study are answer given by the staffs of the organization. The
accuracy of the data collected depends upon the sources.
3. This study is limited to data collection of past 2 years.

CHAPTER- 3

3.1 CREDIT APPRAISAL PROCESS OF BUSINESS LOAN

Receipt of application form from borrower

Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties
documents)

Pre-sanction visit by bank officers

Check for RBI defaulters list, wilful defaulters list, CIBIL data, ECGC caution list, etc.

Title clearance reports of the properties to be obtained from empanelled advocates

Valuation reports of the properties to be obtained from empanelled valuer/engineers

Preparation of financial data

Market information

Proposal preparation

Assessment of proposal

29
 Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of loan

Post sanction activities such as receiving stock statements, review of accounts, renew of
accounts, etc(On regular basis)
3.2 STAGES OF CREDIT APPRAISAL

There are two basic stages:

1. PRE-SANCTION APPRAISAL

2. POST-SANCTION APPRAISAL

1. PRE-SANCTION APPRAISAL: This appraisal is done before the sanctioning

of the loan. The factors to be considered for appraisal in this stage are as follows:
 Financial data of past and projected working results
 Detailed credit report is compiled on the borrower / surety
 Market report
 Final / audited accounts
 Income tax and other tax returns / assessments
 Confidential reports from other banks and financial institutions

2. POST-SANCTION APPRAISAL: this appraisal is done after the sanctioning

of the loan. This must be done very carefully. Some of the factors considered for the
appraisal in this stage are as follows:
 Regular surprise verification of security
 Stock audit
 Obtaining and scrutiny of control statement (stock statements, financial statements)

30
 3.3 CONTROL MEASURES FOR PRE-SANCTION
APPRAISAL
I. HISTORY OF BORROWER

A next-generation algorithm enables banks to scour customer transactions for the past three
years across a multitude of banks and financial institutions and figure out which customers are
undergoing a downturn as far as finances are concerned, and who are improving. This
algorithm also helps to identify which defaulters are repaying other lenders and are therefore
worthwhile pursuing.

Credit information bureau TransUnion-CIBIL recently showed banks its Credit Vision tool to
help them in lending and recovery. "Several banks are testing the solution by doing a retro
analysis before they introduce it in their credit appraisal system," said Harshala Chandorkar,
chief operating officer, TU-CIBIL. She added that banks are expected to go live in the next
couple of months.

While lenders have been relying on analytics to provide automated loans, they had only the
customer's history with the bank to fall back on. They can now use the software to provide
automated loans to even non-customers.

II. TYPE OF ORGANISATION

Certainly banks are required to know what kind of organization is seeking loan, this provide
them much more wide platform to understand about the organization. The organization can be
of public ltd. or it can be private ltd. , or can be sole proprietor, this helps banks to categories
many things like sanction amount and time period, repayment schedules, etc.

III. LOAN APPLICATION

Loan application letter is written to ask for monetary credit service on some kind of secured
mortgage basis. As it is our requirement the words should be so humble and sincere that the
banker or the lender acquires total trust on the applicant. Loan application letter helps the loan
applier to appeal for the various types of loans which ever he wishes to depend upon certain
conditions. This also include what kind of loan applicant is applying for example – Retail Loan,
Business Loan, Personal loan and Secured or Unsecured Loan.

ONLINE LOAN APPLICATION FACILITY

 Online loan application facility for all the Business lending products for
increasing customer reach among the Gen Y customers.

 Tracking of online loan applications from the time of application to the sanction
of loan applications

31
IV. CREDIT INFORMATION BUREAU INDIA LIMITED (CIBIL)

 As per RBI directives, Punjab National Bank Of India is submitting Credit

Information relating to existing borrowers' accounts (both Consumer and
Commercial) to CIBIL.

 The data extraction at Bank level and uploading at CIBIL is done through
automatic process.

 Simultaneously, sufficient user IDs have been provided to field functionaries

for accessing the data of prospective borrowers from the data-base of CIBIL as
a part of "Due Diligence" process.

V. DUE DILIGENCE

The words Due Diligence in the financial sense describe the process by which a bank or
financial institution checks the identity, background and other aspects of the source of wealth
of potential and existing customers. High quality due diligence requires careful and persistent
effort by a financial institution to find out about the background and source of wealth of a
customer.

Due diligence is an investigation or audit of a potential investment. Due diligence serves to

confirm all material facts in regards to a sale. Generally, due diligence refers to the care a
reasonable person should take before entering into an agreement or a transaction with another
party. Due diligence is a way of preventing unnecessary harm to either party involved in a
transaction.

Due diligence involves looking into the past and present of the people and structure of a
company requesting funding. For instance, capitalists are wary of investing in companies that
lack people with credentials or a proven track record. Depending on the overall level of caution
in the investment environment at the time, a due diligence investigation may be more or less

stringent. Typically a capital firm will have a dozen or more investigators whose task is to
research specific details of the personal history of people in the company. With the Internet,
researching a person's past associations and experience has never been easier, much to the
delight of investment communities. The process of Due Diligence is as follows:

INTERVIEW/ DISCUSSION WITH THE APPLICANT:

32
The bank shall carry out discussion with the applicant borrower and ascertain the past track
record, activities presently such as infrastructure arrangements, forward and backward
linkages, sources of margin arrangements for financing tie-up, procurement of raw material,
selling and marketing arrangements etc. The inputs through the process of discussion should
help the bank in taking a decision whether or not to take up the case for evaluation.

INDUSTRY PROSPECTS:

The bank shall ascertain information like present state and future aspects of particular industrial
activity in which the constituent is engaged duly taking into account the market environment
demand-supply position/ major competitors/ markets share/ position of the constituent in the
respective industry.

FINANCIAL STATEMENTS:

The bank shall analyse the financial statements of the constituent/ income/ wealth tax returns/
assessment orders of the constituent/ guarantors. These statements/ documents shall throw light
on growth in sales, profitability, cash accruals, tangible net worth position, investment in
associates, term liabilities, repayment commitment under term loans in relation to cash accruals
etc. The auditor’s notes to the accounts shall reveal the accounting practices followed by the
business entity, details of consignment liabilities including guarantee obligation, claim relating
to income tax/ sales tax/excise duty/custom duty pending in the courts/ tribunals. The
information gathered as above shall enable the bank to get an idea on the business ethics
adopted by the constituent and to take a decision whether or not to have dealings with the
constituent. Information on the associates may also be ascertained.

MARKET INFORMATION:

Opinion about the applicant/ associate shall be collected by making market enquiries with
people in similar line of business/ buyers/ suppliers/ competitors/ employees etc. Where the

33
 bank has fully functional Credit Information Dept., market opinion reports should be called
from the said department besides making independent market enquiries.

Even in the case of existing information on the constituent through market information reports
appearing in the local press/ newspapers/ business/ magazines/ contacts with Government
officials/ businessmen/ banker-colleagues credit rating agencies, the bank shall keep abreast
with the market.

In the case of small borrowers, the bank shall ensure that the individual resides/ undertakes
activity within the command area of the branch and his address shall be got confirmed. Further
discreet enquiries shall be made with nearby residents/ business establishments/ employer/
colleagues on the standing/ credit worthiness of the borrower.

The due diligence certificate which should include the references from whom discreet enquiries
about the company/ promoters were made will form part of the appraisal note.

CONFIDENTIAL OPINION FROM EXISTING BANKER:

Efforts are to be made to obtain confidential opinion from the existing banker in all new
connections. Efforts shall also be made to gather full information on the credit facilities
sanctioned, conduct of account, submission of data/ information etc. The bank may also
examine the account statements of the previous banker to confirm satisfactory past dealings
and operations.

PRE-SANCTION VISIT TO THE APPLICANT’S PLACE:

Pre-sanction visit to the applicant’s place shall be undertaken to confirm the existence of the
unit as well as the assets offered as prime/ collateral security and their acceptability. The visit
shall also be used to understand the trade practices/ manufacturing process of the unit/ interact
with employees/ other relevant persons to collect purposeful information.

It will be the primary responsibility of the recommending authority/ authorities to verify the
antecedents/ credit information of the borrower, acceptability of security and proper analysis
of the financial indicators and correctness of information given in the proposal based on which
sanctioning authority will take final decision after ensuring/ examining policy compliance and
conformity with overall corporate report.

VI. STANDARDISED CREDIT APPRAISAL FORMAT

34
The bank has put in place Standardized Credit Appraisal Formats for appraising the credit
limits. In order to facilitate operational convenience, the Standardized Credit Appraisal
Formats (Board Format) for credit proposals upto Rs.2 crore (upto Rs.5 crore for MSME
borrowers) and above Rs.2 crore (above Rs.5 crore for MSME borrowers) have been advised
vide L&A Circular No.17 dated 08.03.2018 and further modifications/amendments have been
advised through various circulars issued on the subject from time to time. The Standardized
Board Formats should be used for placing the appraisal notes to Sanctioning Authorities.

The following instructions should be kept in view while appraising a credit proposal:

i) Under risk perception, comments about generation of employment, social

development aspects, backward area development incentives, social disorder/unrest,
availability of pollution control certificate, changes in regulatory policies of
local/State/Central Govt. etc. activity is prohibitive or not, location of unit in restrictive
area (i.e. near to Residential, Historic Monuments etc.) be given.

ii) Sensitivity analysis with regard to various adverse scenario viz. increase in project
cost, increase in raw material cost, decrease in selling price etc. and its impact on DSCR
with affected DSCR/IRR should be discussed in proposal.

iii) The officials while appraising a credit proposal should comment about the segment
reporting and disclosure, genuineness of related party transactions, impact of intra-
group transactions on the profitability of the borrowing unit and any material adverse
impact observed in the consolidated financial statement.

iv) Status of charge/mortgage to be given and validity of charge created be furnished.

v) Since Bank is required to keep a close watch on progress of the project during the
currency of term loan by carrying out inspection of project site periodically and submit
the report to sanctioning authority, a condition of maintaining proper records of fixed
assets (i.e. equipments/machinery) and make the same available to inspecting officials
of bank should be incorporated in terms of sanction to facilitate the inspection.

vi) While submitting the Appraisal Note, no column of Board Format should be left
blank/deleted and all pages/Annexure should be duly authenticated. The proposal
should be sent by e-mail on the same day followed by hard copy. It should be ensured
that the hard copy submitted should not be at variance with the proposals sent through
e-mail.

35
 vii) In case the limits sanctioned by HO/ZO/CO are at variance with those
recommended by the Zonal Office/Circle Office/Branch, then while conveying the
sanction, appraisal note should also be forwarded to the respective Appraisal
Cell/Zonal/Circle/Branch along with the reasons of variance so as to minimize the
instances of variance in future.

VII. GENERAL TERMS

Branch heads are advised to make use of the appropriate formats of loan

i) Application. It should be noted that loan application would form a part of loan proposal and
should invariably accompany the proposal being sent to sanctioning authority.

ii) Branch heads, while giving the certificate in loan proposal form, should ensure that the
particulars furnished by the borrower in Loan Application Form have been duly verified and
discrepancies, if any, observed have been indicated in a separate sheet (s) attached to the loan
proposal.

iii) Credit Information Reports (CIRs) on the Borrowers/Guarantors/Co-obligants drawn from

the data base of credit Information Companies (CICs) indicate their past credit history,
overdues, loan accounts written off or settled by way of OTS, enquiries made by Banks/FIs
reflecting that how many times the borrower has approached a Bank/FI for raising any loan
etc. It helps the lending institutions to measure the ability of obligant to pay back the loan and
taking credit decisions.

Drawing of CIR from CICs is mandatory for Borrowers, Guarantors & Co-obligants (both
Consumer & Commercial Category Accounts), requiring fresh credit facilities before sanction
of facilities as well as at the time of Renewal/Review/Enhancement of such facilities except in
certain exempted categories of advances. It has been observed that in most of the fraud cases,
the appraisal guidelines are not followed and drawing of CIR from CICs is ignored.

iv) In respect of borrowers found habitual in late and/or non-submission of requisite

information, matter should personally be discussed with them to ascertain the reasons thereof.
Further, the cases of recalcitrant borrowers should promptly be reported to Controlling Offices
along with the line of action deemed necessary.

v) Sometime, Branch heads, in organisational interest, have to exceed their vested loaning
powers, then after such a transaction has taken place including the cases where telephonic/oral
sanctions were obtained from the higher authority for exceeding the powers), it should be

36
reported immediately to the Controlling Offices, for confirmation of action by the Competent
Authority through submission of a proposal on Bank‟s prescribed format as per L&A Circular
No.51 dated 16.07.2016 giving the details/justification and explaining the circumstances
necessitating accommodation beyond their powers and the reason why it was not possible to
have prior approval from the Competent Authority.

Proposals for confirmation are not to be linked with the renewal/review/sanction of facilities.

vi) The Branch heads should keep a watch on operations in borrowal accounts so that cases of
diversion of funds, if any, could be brought to light at the earliest opportunity for taking
corrective action.

vii) The present activities/interests of the borrower even in other concern need to be looked
into thoroughly. Wherever applicable, CRs from the bankers where the group concerns have
their banking arrangements should invariably be called.

viii) While granting credit facilities to associate/allied concerns, the quantum and need for
credit of the sister concerns in conjunction with the facilities availed of by the parent company
or the borrower group as a whole should be ascertained. Transactions in borrowal accounts
need critical monitoring to prevent diversion of funds through credit to associate/allied
concerns.

ix) In case of trading finances, it should be ensured that it does not lead to hoarding/speculation.

Bank credit for working capital purposes for borrowers requiring fund based limits up to a
specified extent (presently Rs.5 crore in case of MSME borrowers and Rs.2 crore in case of
other borrowers from the banking system is required to be assessed at 25% of the projected
th
annual turnover of which atleast 4/5 or 20% should be provided by the Bank and the balance
one-fifth or 5% should be contributed by the promoters.

Assessment of working capital limits in respect of borrowers not eligible to be provided fund-
based working capital limits under “Simplified Turnover Method” (as explained above), is to
be done as per MPBF system (Second Method of Lending), except in case of Tea & Sugar
industries etc. where credit requirement is assessed as per cash budget system. Such types of
facilities should be adequately collaterally secured by mortgage of IP or pledge/assignment of
other tangible assets as far as possible.

x) At the time of review/renewal/enhancement of existing cash credit limits, it is to be ensured

that the credit summations in CC account are in proportion to sale. It has been observed that
borrowers resort to transfer funds between CC and current account to increase the credit
summations which also results in diversion of funds and increase the chances of escaping
borrowal account from slippage to NPA category.

37
In order to avoid such instances, it is advised that in cases where CC limit has been sanctioned,
maintaining/continuance of current accounts is not to be permitted unless specifically
mentioned in the terms of sanction or subsequently allowed by the Competent Authority on
merits of the case.

xi) In case of project finance, the promoter/borrower may bring in his upfront contribution
(other than funds to be provided through internal generation) and branches should commence
its disbursement after the stipulated funds are brought in by the promoter/borrower. In the
meeting of Executive Directors, CROs and CTOs of all PSBs held at SBI, Gurugram to discuss
about the best practices followed by different banks, following control measure emerged for
implementation:

“Equity has to be brought in by the promoter upfront. Quality of equity shall also be assessed
by verifying its loss absorption capacity.”

As such, it is advised that the promoter’s/borrower’s funding sequence i.e. upfront

contribution/contribution on pro-rata basis should be clearly stipulated in the terms of sanction
and should be fully complied with. Also, at the same time, quality of equity should also be
assessed and be made part of credit appraisal to ascertain its loss absorption capacity. It should
be ensured that at any point of time, the promoter’s contribution should not be less than the
proportionate share.

xii) In a conclave titled “PSB Manthan” of PSB Executives, one group titled as “Enhanced
Credit Off-take” was headed by our MD&CEO, in which it was deliberated that lending
decisions are to be based on cash flows rather than only on Balance sheet.

In order to strengthen the process of selection/filtration of borrowers, it is advised that as part

of pre-sanction appraisal, besides adhering to other guidelines, due emphasis should also be
given to cash flows of borrower to meet out the repayment obligation particularly in cases
where there is dependence on Government aid/grant/subsidy.

xiii) Before setting up LC limits, the trade cycle should be ascertained and utilization of LC
beyond such Trade Cycle should not be allowed. Each transaction of ILC/FLC needs close
scrutiny.

xiv) At the time of considering proposals of Subsidiaries of Foreign Companies, the possibility
of obtaining Foreign Bank Guarantee/Corporate Guarantee be explored.

xv) While extending credit to Multi-National Companies (MNCs) or where NRIs are
promoters/guarantors, efforts be made to obtain collaterals situated in India and/or guarantee
of parent Company to guard against situations like non- availability of non residents for
recovery of bank dues.

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xvi) While considering credit proposals of Religious/Social Bodies, viability of the project,
availability of sufficient security coverage and generation of sufficient cash flow to meet the
repayment obligations should be ensured. It should also be ensured that :-

 The security is not a religious place of worship, which is not

saleable.
 Trust Deed/Memorandum and bye-laws should carefully be
examined to ensure that its provisions contain power to borrow
and providing security.
 Unless there is personal guarantee of trustees holding important
post in these bodies, the finance should be discouraged.

xvii) Fresh CRs should invariably be compiled after the lapse of every two years even though
there may not be any change in the constitution and financial position of the party. It should be
carefully noted that No Change Certificate must not be sent for more than two years and fresh
CR should be prepared in the third year containing the following information:

“Supersedes CR No. _________ dated __________.”

xviii) Ministry of Finance (MOF) has observed that some of the borrowing companies are
going for frequent changes in Management structure. It is therefore advised that the dealing
officials should be more vigilant and complete the process of due diligence while dealing with
such companies where frequent changes in management structure are observed, while taking
credit decision.

APPLICABILITY OF KYC NORMS TO BORROWAL ACCOUNTS

Banks are required to follow „Know Your Customer‟ (KYC) norms in terms of guidelines
issued by RBI and „Prevention of Money Laundering Act-2002‟. Apart from checking the
money laundering activities, KYC norms are an important tool for checking frauds and risks,
thereby protecting bank‟s image. Sound KYC procedures must be seen as a critical element in
the effective management of banking risks.

KYC safeguards go beyond simple account opening, record-keeping and require banks to
formulate a customer acceptance policy and a tiered customer identification programme that
involves more extensive due diligence for higher risk accounts enabling banks to
know/understand their customers and their financial dealings better, which in turn help them
manage their risks prudently.

39
 There have also been cases of impersonation of borrowers and guarantors as the laid down
guidelines as above were not adhered to by the branch officials. In this connection, it is clarified
that KYC guidelines aimed at identification of the customer opening an account with the Bank
are applicable to borrowal accounts as well. Borrowers and guarantors must be identified as
per KYC norms and it should be ensured that the person signing our documents is genuine one.
In order to prevent Bank from being used by unscrupulous elements, it is emphasized that
guidelines for account opening and e-KYC verification, issued by KYC/AML Cell, PSFID,
RBD, from time to time should be followed while opening any loan account. The guidelines
issued by IAD/Compliance should also be taken care.

VIII. Maximum Permissible Banking Finance (MPBF)

MPBF stands for Maximum Permissible Banking Finance in Indian Banking Sector. MPBF is
mainly a method of working capital assessment. As per the recommendations of Tandon
Committee, the corporate are discouraged from accumulating too much of stocks of current
assets and are recommended to move towards very lean inventories and receivable levels. This
is where MPBF comes into picture. There are 2 methods for MPBF calculation.

MPBF Calculation : (Total Current Assets - Other Current Liabilities) - 25/100*(Total Current
Assets - Other Current Liabilities)
Or
MPBF = 75/100*Working Capital Gap
Depending on the size of credit required, two methods of maximum permissible banking
finance are in practice to fund the working capital needs of the corporate.

MPBF Method I:
For corporate whose credit requirement is less than Rs.10 lakhs, banks can find the working
capital required. Working capital is calculated as difference of total current assets and current
liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF).
Banks can finance a maximum of 75 per cent of the required amount and the rest of the balance
has to come out of long-term funds.

MPBF Method II:

For corporate with credit requirement of more than Rs.10 lakhs this method is used. In this
method, the borrower finances minimum of 25% of its total current assets out of long term
funds. The rest will be provided by the bank through MPBF. Thus, total current liabilities
inclusive of bank borrowings could not exceed 75% of current assets.

IX. TECHNO ECONOMIC VIABILITY

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 Techno Economic Viability (TEV) / Feasibility Study services are required by Banks /
Financial Institutions to understand the risks inherent in any financing / investments in various
green field or expansion projects. The feasibility study includes the review of technical as well
as the financial aspects of a project.
The purpose of Techno Economic Viability study is to aid the sanctioning authority to arrive
at an informed judgment as regards acceptability of the project for lending (or investment)
purpose.

RBSA has the capability of undertaking technical and economic viability studies and has
worked effectively with engineering organizations, land appraisers, stock brokers, investment
bankers, accounting and auditing companies and legal consultants. These techno economic
viability studies will be prepared in compliance with the requirements and guides of all
concerned regulatory authorities.

RBSA’s Techno Economic Viability Study provides appraisal of techno-commercial

parameters of a project and its impact on RBSA’s Techno Economic Viability Study provides
an appraisal of techno-commercial parameters of a project and its impact on the financial
viability. Our services include appraisal of technical aspects of the project, study of the
competitive business environment and its impact on the finances.
RBSA provides end to end services in this space by providing detailed forecast assessment of
any new or existing project, detailed analysis of costs, independent market research, viability
of the project, and providing suggestions and recommendations to the project owner.

Our strategy and implementation process includes exploring issues such as:
. Business Opportunity Scanning
. Market Research
. Technical Feasibility
. Project Cost Estimation
. Operating Cost Estimations
. Resource Requirements
. Suggested Funding Patterns
. Financial Feasibility

X. RATIO ANALYSIS

The study and interpretation of the relationships between various financial variables, by
investors or lenders. An integral aspect of fundamental analysis involves performing what
many would call “ratio analysis”. This involves calculating a number of different industry
standard ratios and comparing them to various benchmarks. The benchmarks can be the ratios
of other competitors, industry average ratios, or industry “rules-of-thumb”. There’s no set
procedure for performing ratio analysis because it all depends on the type of company you’re
analyzing – certain industries have industry specific ratios. Regardless, this article will give
you an overview of some of the standard ratios and what they may tell us about a company. I’ll
group ratios into four categories used to evaluate the different facets of a company’s
performance and overall condition: liquidity, operating performance, leverage, and equity
valuation.

The Current Ratio is the perhaps best-known measure of a company’s liquidity.

41
 The Quick Ratio is a more stringent measure of a company’s short-term liquidity position.
Inventory Turnover measures how efficient the firm is in processing inventory and inventory
management. It measures how lean the firm runs with respect to inventory and how quickly it
can sell its inventory.

The Debt-to-Total Capital Ratio measures the degree to which the firm has been financed by
debt.

The Interest Coverage Ratio can help to determine the firm’s ability to repay its debt
obligations.

Another way of measuring whether a company will be able to meet upcoming debt obligations
is to use the Cash Flow to Interest-Bearing Debt Ratio. Countless ratios exist, and this list is
by no means exhaustive. I’ve tried to identify the most widely used and what are in my opinion,
the most relevant ratios in the industry. Ratio analysis works best as a supplement to other
stock analyses. Remember, you have to make comparisons among companies in a particular
industry, or to historical averages. Performing ratio analysis correctly will take time, a lot of
time, but when it comes to investing your money, you should always be willing to spend time
to make an informed decision.

a) Current Ratio = Current Assets

Current Liabilities

b) Quick Ratio = Current Assets-Inventory or Stock

Current Liabilities

c) Debt-Equity Ratio = Total Debt

Total Equity

d) Gross Margin = Gross margin x 100

Net Sales

e) Net Profit Margin = Net Profit after tax x100

Net sales

f) Operating Profit Margin = Operating Profit x 100

Net sales

g) Depreciation Expense to operating Expense Ratio = Depreciation Expense

Total Operating Expense

h) Inventory turnover = Cost of goods sold

Average inventory or stock

i) Times Interest Earned = EBIT

Interest Expense

XI. ROCE (RETURN ON CAPITAL EMPLOYED)

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 Return on capital employed (ROCE) is a financial ratio that measures a company's profitability
and the efficiency with which its capital is used. In other words, the ratio measures how well a
company is generating profits from its capital. The ROCE ratio is considered an important
profitability ratio and is used often by investors when screening for suitable investment
candidates.

ROCE= EBIT
Capital Employed

where:

EBIT=Earnings before interest and tax

Capital Employed=Total assets − Current liabilities

ROCE is especially useful when comparing the performance of companies in capital-intensive

sectors such as utilities and telecoms. This is because unlike other fundamentals such as Return
On Equity (ROE), which only analyzes profitability related to a company’s common equity,
ROCE considers debt and other liabilities as well. This provides a better indication of financial
performance for companies with significant debt.

XII. NATURE OF ACCOUNTS

a) TERM LOAN :
A term loan is a loan from a bank for a specific amount that has a specified repayment schedule
and either a fixed or floating interest rate. A term loan is often appropriate for an established
small business with sound financial statements. Also, a term loan may require a substantial
down payment to reduce the payment amounts and the total cost of the loan.

 A term loan is a loan issued by a bank for a fixed amount and fixed repayment schedule
with either a fixed or floating interest rate.

 Companies often use a term loan's proceeds to purchase fixed assets, such as equipment
or a new building for its production process.

 Term loans can be long-term facilities with fixed payments, while short and
intermediate-term loans might require balloon payments.

TYPES OF TERM LOAN

1. A short-term loan, usually offered to firms that don't qualify for a line of credit,
generally runs less than a year, though it can also refer to a loan of up to 18 months or
so.

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 2. An intermediate-term loan generally runs more than one but less than three years and
is paid in monthly installments from a company’s cash flow.

3. A long-term loan runs for three to 25 years, uses company assets as collateral, and
requires monthly or quarterly payments from profits or cash flow. The loan limits other
financial commitments the company may take on, including other debts, dividends, or
principals’ salaries and can require an amount of profit set aside for loan repayment.

b) CASH CREDIT:
A cash credit loan is a short-term source of finance, having a tenure of up to one year.
Under the short-term finance option, the bank offers its applicant to take a loan up to a
certain limit depending on their credit history.

This type of loan is extended to businesses and companies to fulfill their working capital
requirement. This allows the customer, typically a business or company with a proven track
record of profit, to withdraw money which is more than the balance available in their
accounts. Cash credit is also known as Bank Overdraft facility.

Leading banks, such as IDBI Bank provides cash credit facility for businesses to finance
their day-to-day requirement. The finance can be utilized for the purchase of raw materials,
stores, fuel, for payment of wages for labor, power charges, for storing goods till they are
sold out & for financing the sales by way of sundry debtors/receivables. Cash Credit facility
is granted to companies to bridge the working capital gap, by way of a running account.
The withdrawals are regulated and the withdrawal limit is arrived at based on the structure
of current assets and liability.

Security :

Cash Credit (CC) is granted against hypothecation of stock and assets such as raw
materials, work-in-process, finished goods and stock-in-trade, including stores and spares.

c) OVERDRAFT
Overdraft is a financial instrument in which the money can still be withdrawn from the current
or savings account, even if the account balance goes below zero. It is a type of extension of
monetary limit offered by banks and that money is said to be ‘overdrawn’. An authorized
overdraft limit is assigned for each customer depending on their relationship with the bank.
The customer can withdraw money up till the assigned limit. Banks do charge interest rate on
the money withdrawn in form of overdraft.

Overdraft Account – Features

. Overdraft account is a facility that can be availed by maintaining any bank account
. Several private sector banks are now offering this facility for both salary and savings account
holders

44
. The money extension is granted on the basis of customer’s account value, repayment history
or credit score
. It is short-term credit provided by the bank that needs to be paid within the stipulated time
limit
. Credit amount or overdraft attracts interest for the time of use which can be from a couple
of days to a few weeks
. Repayment tenure is decided by the bank and it has full authority over the account and its
use
. As per the RBI regulations, current accounts and cash credit accounts are eligible for a
maximum of Rs. 50,000 per week
.
Overdraft is a significantly useful feature provided by the banks, as it offers aid to businesses
in terms of cash flow to meet their working capital expenditure. Businesses often have to wait
for the payments from their clients and this results in delayed payments from their side as well.
With the support of overdraft in their current accounts, businesses can sign cheques for their
clients beyond the available funds in their account. This prevents cheque dishonour and
maintains the reputation of the business, as well.

d) DEMAND LOAN :
A demand loan is a rare form of loan that can be called for complete repayment For a
lender a demand loan can be quite secure and lucrative. The longer the borrower takes to
pay it back, the more interest is earned. However the lender doesn't have to wait until a
maturity date, and if they fall on hard times they can call the loan, or if they suspect the
borrower will fall on hard times or is deliberately avoiding paying the loan they can demand
repayment.

This is a great security measure to ensure repayment. For example if the lender senses or
sees the borrower going down a bad financial path, they can call the loan before it defaults.
If there is a default with a regular loan the lender may only get a portion of the money back.
Think of it as a preemptive strike.

e) BANK GUARANTEE :
A bank guarantee is a type of guarantee from a lending institution. The bank guarantee means
a lending institution ensures that the liabilities of a debtor will be met. In other words, if the
debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or
debtor, to acquire goods, buy equipment or draw down a loan.

Because of the general nature of a bank guarantee, there are many different kinds:

 A payment guarantee assures a seller the purchase price is paid on a set date.

 An advance payment guarantee acts as collateral for reimbursing advance payment from the
buyer if the seller does not supply the specified goods per the contract.

 A credit security bond serves as collateral for repaying a loan.

 A rental guarantee serves as collateral for rental agreement payments.

45
 A confirmed payment order is an irrevocable obligation where the bank pays the beneficiary
a set amount on a given date on the client’s behalf.

 A performance bond serves as collateral for the buyer’s costs incurred if services or goods
are not provided as agreed in the contract.

 A warranty bond serves as collateral ensuring ordered goods are delivered as agreed.

f) SECURITY
One of the major functions of a bank is to provide credit to the customers for various purposes
such as home, vehicle etc., and a bank’s strength and solvency depends on the quality of its
loans and advances. Security resembles an insurance against emergency. It provides a
protection to the lender in case of loan default as the lender could acquire the security if the
repayment is not done by the borrower.
WHAT IS SECURED AND UNSECURED LOANS :
An arrangement in which a lender gives money or property to a borrower and the borrower
agrees to return the property or repay the money, usually along with interest, at some future
point in time is called a loan.
A loan can be broadly classified as a secured and unsecured loan.

SECURED LOANS

Secured Loans are those which are protected by some sort of asset or collateral, for example –
mortgage, auto loan, construction loan etc. If the lender is unable to repay the loan, the
borrower has the right to sell off the asset to recover the loan.

UNSECURED LOANS

Unsecured loans include things like credit card purchases, education loan where borrower don’t
have to provide any physical item or valuable assets as security for the loan. If a person is not
able to repay this type of loan it leads to a bad credit history which creates problems in future
when he tries to get a loan from other lenders or the lender may appoint a collection agency
which will use all its possible tools to recover the amount.

IMPORTANCE

For lender: It reduces the risk associated with the loan default as in the case of insolvency of
the borrower the lender could sell off his asset to compensate the loss occurred. Moreover, the
borrower will make payments if he doesn’t want to lose his pledged security.

For borrower: Secured loan has a low rate of interest and give more time to repay the loan so
a borrower with low income can easily afford it. Secondly, if a borrower has bad credit or
limited income, most of the financial institutions are reluctant in providing a loan but if he
pledges collateral, the lender may be more willing to approve his application.

46
THERE ARE TWO TYPES OF SECURITY

PRIMARY SECURITY

When an asset acquired by the borrower under a loan is offered to the lender as security for the
financed amount then that asset is called Primary Security. In simple terms, it is the thing that
is being financed.

Example: A person takes a housing loan of Rs 50 lakh from the bank and purchases a
residential loan. That flat will be mortgaged to the bank as primary security.

COLLATERAL SECURITY

If the bank or financial institution feels that the primary security is not enough to cover the risk
associated with the loan it asks for an additional security along with primary security which is
called Collateral Security. It guarantees a borrower’s performance on a debt obligation. It can
also be issued by a third party or an intermediary.

Example: A person takes a loan of Rs. 2 crore for the types of machinery. So to secure itself
in the case of default by the borrower it asks for mortgaging residential flat or hypothecating
jewellery, which will be termed as collateral security.
RBI has advised the banks not to obtain any collateral security in case of all priority sector
advances up to Rs. 25000. In other cases, it is left to the mutual agreement of the borrower with
the bank.

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 3.4 POST SANCTIONING & FOLLOW UP OF LOAN
ACCOUNT TO CONTROL NPA

ADHERENCE TO TERMS & CONDITIONS

Instances have come to notice that advances were disbursed by the Branch without fulfilling
the terms and conditions stipulated in relative sanctions, which is highly irregular practice. It
should be realised that there are specific intentions behind stipulating the terms and conditions
and if these are violated, the very basis of making the advance itself is forfeited and it may be
difficult to enforce compliance after disbursement of the loan. Branch heads are advised to
ensure that all the terms and conditions laid down in sanctions are duly complied with before
releasing the funds to borrowers. The Branch heads are also advised to send a certificate to
sanctioning authority, within one month of receipt of sanction that the advances were disbursed
only after fulfilling terms and conditions laid down in the sanctions.

a. In order to have control over compliance of all terms and conditions of the sanction, it
is advised as under:

 COs should diarise this and ensure compliance.

 In case there is any difficulty in complying with the terms of the sanction,

the branch should immediately refer the matter to competent authority. Necessary
approval must be obtained and kept with the documents before permitting any deviation
from the terms of sanction.

 Bank’s internal auditors/concurrent auditors should ensure compliance of the

guidelines.

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 Instances have come to the notice of Department of Financial Services (DFS), Ministry
of Finance (MOF), wherein there were delay in disbursal of the loans and on enquiry it
transpired that the delay was on account of non compliance of the conditions which
were orally conveyed to the borrower.

It is, therefore, advised that the Branches should communicate the terms and conditions
of sanction to the borrower in respect of all loans, through a letter in prescribed format
containing the details of facilities sanctioned and the respective terms and conditions
and borrower(s) shall convey his/their acceptance of the terms & conditions in
prescribed format, which shall be kept on record. Prescribed formats are available as
per Annexure I & II to chapter 13 of Book of Instructions on Loans.

b. In case of consortium advances, where our Bank is leader, all participating banks be
advised to disburse the facility only after completion of documentation irrespective of
whether the borrower is from private or public sector. In cases where our Bank is a
member of the consortia, senior officers from our Bank participating in consortium
meeting should insist for the same.

However, in cases where consortium members are taking individual documents

(followed by inter-se agreement, etc.) the above guidelines will not apply. In such cases,
branches participating in consortium should send a communication on the letter
prescribed for the purpose to the Lead Bank in terms of extant guidelines.

LEGAL COMPLIANCE CERTIFICATE

 The Mitra Committee on Legal Aspects of Bank frauds set up by RBI, inter- alia, suggested
that a legal compliance certificate needs to be mandated in all transactions exceeding a
value limit. In case of exercise of discretionary power, an explanation is required to be
given indicating the circumstances warranting the exercise of discretionary power and
whether all due diligence has been taken or not. The recommendations, thus envisage
establishment of an in-house legal compliance certification process from each desk
especially from each management category staff for making them accountable.
 Accordingly, based on RBI guidelines, the system of submission of Legal Compliance
Certificate by branches to their respective Controlling Offices has been put in place. Under
the system, branches are required to submit Legal Compliance Certificate as per Appendix-
III along with Schedule-I (Appendix-III A), certifying the compliance of all the formalities
contained therein. Pending formalities, if any, need to be reported in Schedule-II
(Appendix- IIIB).

49
 All Branches, including LCBs, are to submit Legal Compliance Certificate along with
Schedule I & II, for credit limits of Rs. 10 lac and above (Fund Based & Non Fund Based)
in respect of fresh sanction/enhancement/renewal to respective controlling office within 7
days from the end of the month in which the facilities are disbursed.

 Legal Compliance Certificate should also be submitted by branches in case of renewal of

credit limits of Rs. 10 lac & above (both fund based and non fund based) provided there
are changes in the terms & conditions of the existing sanction, approved by the competent
authority while renewing the limits or otherwise.
 The pending formalities, if any, reported in the format of Schedule II should continue to be
submitted in subsequent months till all the formalities are completed. However, after
completing all the formalities, a final „Nil‟ certificate in Schedule II be submitted.

 Controlling Offices should ensure compliance of guidelines in respect of Legal Compliance

Certificates by all branches under their control.

VALIDITY OF CREDIT LIMIT SANCTIONS

In terms of Loaning Powers guidelines, it has been stipulated that sanctions in respect of
working capital and term loan facilities shall be valid for six months from the date of sanction.
Facilities not availed within the above period should be treated as lapsed and borrower be
advised accordingly. Unless a lapsed sanction is got revalidated by the Competent Authority
within a maximum period of 12 months from the date of sanction, no facility should be
released. Following powers shall be applicable for revalidation of the sanctions:

Sl. no. Sanctions made by Competent Time period up to

authority to which revalidation
consider re- can be considered
validation from the date of
sanction

1. Sanctions up to HOCAC- III Sanctioning 12 months

Authority

2. Sanctions made by MC HOCAC-III & II 12 months

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However, to safeguard the bank’s interest, while permitting revalidation, the competent
authority shall obtain and study the latest financials of borrowers/units and also ensure that
the projections submitted at the time of original sanction continue to hold good.

Further, in order to put in place an effective monitoring system, to ascertain the details of
borrowers who have not availed the credit facilities within the stipulated period and the
relative sanctions have lapsed, details of sanctions lapsed at the level of Circle Head & above
be submitted by all Circle Offices to CRMD, on half- yearly basis (31st March and 30th
September) as per the format available at Appendix-IV. The information will help in
compiling relevant data at Head Office and placing the same to higher authorities for
information.

END USE OF FUNDS

As a matter of prudence, Bank needs to ensure end-use of funds it has lent. It is necessary to
ensure that the Bank does not depend entirely on the end-use certificates issued by Chartered
Accountants but strengthens its internal controls and the Credit Risk Management System to
ensure end-use of funds which would enhance the quality of the loan portfolio. Some of the
illustrative measures that could be taken by the branches to ensure end-use of funds are:

i) Meaningful scrutiny of quarterly progress reports/operating statements, balance sheets of

the borrowers;

ii) Regular inspection of borrowers‟ assets charged to the Bank as security;

iii) Periodical scrutiny of borrowers‟ books of accounts;

iv) Periodical visits to the assisted units;

v) System of periodical stock audit, in case of working capital finance;

vi) The appraising office, i.e. Branch Office/CCPC, as the case may be, should conduct pre-
sanction visit of borrower’s factory/business premises/IP offered as security in the loan
account/borrower’s place of work/residence as part of appraisal and annex the copy of visit
report with the proposal.

vii) In order to minimize the instances of selling off of mortgaged IP/multiple mortgages, etc.
a well defined system for periodic visit to the mortgaged site already in place to ensure that the
security remains charged to the bank during the currency of the loan should be followed.

viii) In order to closely monitor the end use of funds, branches are advised to obtain necessary
certificates from the borrowers, particularly in case of Corporate Loans, Working Capital
Finance, Project Finance, Short Term Loans etc., certifying that the funds have been used for

51
the purpose for which these were obtained and are not diverted to Capital Market/some other
use.

Ministry of Finance has advised that Public Sector banks must be vigilant as regards to the end
use of loans & advances granted to its customers and the cases where the customer utilized the
loans for the purpose of repaying debt with other entities (without prior approval of the bank),
should be placed before the Board of Directors in the ensuing meeting with its salient details
as soon as it comes to the notice. In this context, it is advised as under:

a) Branches to submit the information regarding utilization of loans by the customers for
purpose of repaying debt with other entities (without prior approval of the Bank) to their Circle
Offices on the proforma (Appendix V) immediately on occurrence of the event.

b) Circle Offices to consolidate the information received from branches & submit the same to
CRMD, HO under a copy to respective ZO.

c) CRMD, HO to consolidate such information received from various Circle Offices and will
place the same to Board in ensuing meeting for information.

RBI has advised that in case of incorrect certification by the borrowers, prompt action as may
be warranted, may be initiated which may include withdrawal of the facilities sanctioned and
legal recourse as well. In case a specific certification regarding diversion/siphoning of funds is
desired from the auditors of the borrowers, a separate mandate may be awarded to them and
appropriate covenants incorporated in the loan agreements.

Although the standard loan documents contain clause to cover the above issues, there may be
specific cases where the agreement obtained/to be obtained in respect of credit facilities does
not contain the same. It is advised that in such cases the Supplemental Agreement as per
Appendix-VI may be obtained to safeguard bank’s interest. Further, all aspects of diversion of
funds in the borrowal accounts should be duly examined by:

i) Field functionaries at the time of periodical reviews of the limits/credit facilities; and

ii) Inspectors and Auditors during internal audit/inspection.

In the matter of Credit Assessment Monitoring, the confirmation of balances in

deposit/borrowal account should be sent directly to the respective Auditor and the financial
statements/certificates submitted by the borrowers should be reviewed diligently. RBI has
observed that some banks are not providing balance confirmation to the Statutory Auditors
despite authorization from the auditee. Since balance confirmation certificate is part of audit
evidence which holds a critical place in forming the auditor’s opinion on the financial
statement, it is essential that the evidence is not only relevant but reliable as well.

52
Accordingly, it is advised that information with regard to balance confirmation in respect of
various accounts of auditees may be furnished to the Statutory Auditors subject to the consent
of auditee. The said information may be provided on the format as per Appendix-VII or on
nearly similar format as sought by the Statutory Auditors from bank for the purpose of enabling
them to certify balance sheet of the auditees.

CANCELLATION OF BORROWERS’ LIMITS

Branch heads while recommending cancellation of credit facilities of borrowers to the

sanctioning authorities must furnish the following information:

i) Reasons for proposed cancellation;

ii) Latest position of accounts indicating nature & amount of facility, value of

security, drawing power and balance due;

iii) Steps taken/proposed to be taken for adjustment of outstanding dues.

iv) In case nothing is outstanding against the borrower, following certificate

must be sent:

"Certified that M/s______________ whose limits have been/proposed to be cancelled by us do

not owe to the bank anything in any shape."

DISBURSEMENT IN TERM LOAN

Instances have come to our notice wherein borrowers have been able to defraud the bank by
submitting quotation/invoice and getting the loan disbursed in the name of non-existent firms.

It is therefore advised that the mode of disbursal of loans have to be streamlined.

Accuracy/correctness of price of any asset being financed shall be ensured by reference to the
website of manufacturers, wherever price is available on website. If the payments are not being
released to manufacturers, reasons thereof are to be ascertained and recorded. If there is any
price variation from the price displayed in website, it should be subjected to scrutiny and
explanation to our satisfaction to be obtained.

Presently, the above guidelines to be implemented in high value purchases above Rs.1 crore.
However, in other cases also the genuineness of supplier/reasonableness of the price to be
ascertained, while sanctioning/disbursing the loans.

53
Further, it is also advised that the genuineness/credentials of the supplier/dealer must be
ascertained before disbursing the loan amount by visiting the supplier/dealer’s place/by
reference to the website of supplier/dealer or by adopting other means such as search the
internet, making telephone call etc. besides ensuring correctness of cost/price of asset being
financed by the bank.

DEFAULT IN PAYMENT OF TERM LOAN INSTALMENTS

There are several instances of default in payment of instalments of term loans by borrowers,
but branches generally do not inform the same to their Controlling Offices. The Branch heads
should realise that default in payment of instalments for long periods is not a matter to be
passed over lightly as it may be indicative of incipient sickness which would jeopardize the
safety of funds made available by the Bank to borrower. Branch heads are, therefore, advised
that system of monitoring of irregular loan accounts should be followed meticulously.

PAYMENT OF DEFAULTED AMOUNT

When the borrower is not in a position to pay the dues under the facilities such as Deferred
Payment Guarantee/Devolvement of LC/Invocation of LG/Non-Payment of Co-accepted
Bills/Unpaid Term Loan instalments from its own sources, the branches, besides taking steps
for recovery of dues as under, should simultaneously ensure availability of charge on the assets
so charged to the bank:

(A)For Overdue Instalments in Term Loan Accounts

When party’s account is regular: Amount of overdue instalment should be

debited to the party’s account.

When account is irregular: All such overdue instalments should be allowed to continue in the
respective Term Loan account and should not be debited to CC account, which is already
irregular/likely to become irregular or is in NPA category. For overdue term loan instalments,
penal interest be charged as per extant guidelines. As and when party’s account permits
recovery of amount in default, the same be debited immediately and the concerned overdue
Term Loan account be credited.

(B) For Default in DPG/LC/LG/Co--Accepted Bills

Amount in default of devolved/invoked DPG/LC/LG/Co-Accepted Bills will be directly

debited to main operating account of the customer (CC/OD/CA) in transaction system (CBS)
itself and remittance made. The Controlling Office will be apprised of it and follow up
steps/remedial action for regularization of such accounts will be taken.

54
To facilitate operations in account, tagging may be allowed by competent authority in terms of
extant guidelines. Tagged amount out of each credit would be retained in operating account of
the borrower and DP will be raised accordingly by manual procedure. Balance amount,
reflected in CBS system may be availed by the party.

Monitoring of such accounts will be done on daily basis by pulling the data from CBS system,
as advised under framework for Revitalizing Distressed Assets, conveyed vide L&A Circular
no.40 dated 03.04.2014 and subsequent circulars issued on the subject from time to time.
Prompt steps will be initiated for regularization of such accounts.

For the convenience of field functionaries, process flow (CBS screen shots) for delinking and
dishonour for Inland/foreign LCs through Bills has been given in L&A circular no.20 dated
30.03.2016 and subsequent circulars issued on the subject from time to time. For any
clarification/assistance pertaining to process flow, the matter may be referred to ITD (CBS),
Head Office.

STOCK STATEMENTS

It is incumbent upon borrowers to submit the Stock Statement in time. The Branches on their
part, must insist upon the borrowers for timely submission of stock statements as experience
shows that when the security is not in order, there is an attempt by the borrower to avoid or
delay the submission of stock statements so that the adverse features that might have
developed, remain hidden from the banker. If any borrower delays submission of stock
statement consecutively for 2 months without satisfactory reasons, Branch heads may adopt
stiffer measures like giving notice for stopping operations in the account and the matter should
be reported to the Controlling Office. The Branch heads are also advised to keep the
Controlling Office posted if any shortage in margin is observed on inspection of stocks of the
borrowers.

ANNUAL REVIEW/RENEWAL OF WORKING CAPITAL LIMITS

 The system of Annual Review and Renewal enables the Bank to have a look at the
borrower's performance and the end-use of funds granted to him. It also permits the bank
to judge whether the conduct of the account has been satisfactory and whether the funds
made available by the Bank to the borrower are safe.

Timely Renewal/Review of borrowal accounts is very important. Such exercise enables the
bank to take stock of the situation and arrive at a conscious decision about the continued credit

55
worthiness of the borrower and whether need-based credit facilities can continue to be granted
to the borrower.

It is, therefore, advised to ensure that working capital limits are positively renewed/reviewed
at least once a year without fail. Branches are also advised to treat borrowers continuing on
lapsed sanction as high risk borrowers and should monitor the operations in such accounts
closely for safeguarding bank's interest.

Statutory Central Auditors have observed that frequent short reviews in borrowal accounts are
being undertaken which prevents the bank from undertaking a consolidated view on the
continuation of limit in the account.

Since the system of annual renewal of loan accounts enables the bank to review the borrower’s
performance and monitor end-use of bank finance, it is advised that the laid down guidelines
for timely renewal of limits should be strictly adhered to. Accordingly, it is advised that the
sanctioning authority should avoid frequent short reviews in the account and ensure that the
account is renewed on regular basis as per extant guidelines.

 The non-submission or delayed submission of the latest financials and other information
required for renewal of limits is also viewed seriously by the authorities. In order that the
renewal proposals with complete financial information are completed in time by the Branch
Managers, they should adopt the following procedure:

a) All renewal cases should be diarised at least 4 months in advance and followed up by
Branch/Circle Offices as the case may be so that all the sanctions are renewed in time.

b) Remind the borrowers four months ahead of the due date and collect all relevant data and
information.

c) The proposals, after scrutiny at the branches, should be sent to Controlling Offices so as to
reach them at least two months ahead of due dates.

d) The proposal should be scrutinized speedily at Controlling Offices and must be sent to
Head Office, wherever necessary so as to reach Head Office one month prior to the expiry of
the sanction date.

The above procedure will enable Head Office to process proposals and get approval of the
competent authority well in advance of the due date of renewal. For the procedure to be
effective, it is necessary that borrowers should cooperate and furnish all the necessary data and
information. The borrowers should, therefore, be advised properly and prevailed upon to
cooperate in the matter.

Where, for certain exceptional circumstances, a sanction cannot be renewed, a review note on
Board format in respect of H.O. sanctions must be submitted before the expiry period of
sanction. Similarly, in case of other sanctions if renewal is not possible in time, a review note
must be submitted to the sanctioning authority.

Further, RBI has advised that regular and adhoc credit limits need to be reviewed/ regularized
not later than three months from the due date/date of ad hoc sanction. In case of constraints
such as non-availability of financial statements and other data from borrowers, branch should

56
furnish evidence to show that renewal/ review of credit limits is already on and would be
completed soon. In any case, delay beyond six months is not considered desirable as a general
discipline. Hence, an account where the regular/ ad hoc credit limits have not been reviewed/
renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.

REVIEW OF BORROWAL ACCOUNTS TO IDENTIFY POTENTIAL NPAS

Branches should identify potential NPAs and take all pre-emptive steps to check fresh slippage
to NPA category. Some of the instructions for identification of NPAs requiring urgent attention
are as under:

a) If interest and/or instalment of principal in any account/facility remains out of

order/overdue/unpaid for a period of more than 90 days, the account will be treated as NPA
even though the unit may be working or the borrower’s financial position is satisfactory. In
certain categories of Agriculture advances, the account shall become NPA if interest and/or
instalment of principal thereon remain overdue for two crop seasons for short duration crops
or for one crop season for long duration crops.

b) Outstanding in the account based on drawing power calculated from stock statements older
than 3 months would be deemed as irregular. A working capital borrowal account will become
NPA if such irregular drawings are permitted in account for a continuous period of 90 days
even though the unit may be working or borrower’s financial position is satisfactory.

c) An account where regular/adhoc credit limits have not been renewed/ reviewed/regularized
within 180 days from due date (of renewal/review/date of adhoc sanction) will be treated as
NPA.

d) Proposals for restructuring/rescheduling/renegotiation of terms of the facilities of potentially

viable entities be considered by Officials within their vested powers as per extant guidelines
issued from time to time.

The accounts which are otherwise in order, but being classified as substandard due to delay in
review/renewal or non-receipt of stock statement, treatment of such accounts as NPA would
limit the Bank’s ability to meet increased working capital needs of such units. Accordingly,
RBI has advised as under:

“An account which has been classified as NPA since it has not been reviewed/renewed within
a period of 180 days from the due date/date of adhoc sanction or since irregular drawings (based
on stock statements older than three months) were permitted in the account for a continuous
period of 180 days may be upgraded as, Standard asset immediately on review/renewal of
limits or on receipt of the relevant stock statement respectively, if the account is otherwise in
order.”

MIS TO MONITOR WORKING CAPITAL LIMITS OVERDUE FOR

RENEWAL/REVIEW:

57
Branches shall prepare the position of Working Capital limits overdue for Renewal/Review on
the proforma as per Appendix VIII on last day of each quarter and furnish the same to their
controlling offices within 7 days of the close of quarter. COs shall submit consolidated
statement to CRMD, HO within 15 days of the close of quarter.

Details of sanctions overdue for renewal/review above 3 months should be submitted along
with above statement, on the proforma as per Appendix-IX. Reasons/present status/proposed
action plan should invariably be mentioned therein.

At HO level, CRMD shall monitor overdue sanctions and put up the position on quarterly basis
to MD & CEO along with details of overdue accounts having limits of above.Rs.10 crore. A
statement of overdue renewal proposals sanctioned by Board/MC shall be put up to MC
annually by CRMD.

The cut off limit for monitoring of statement of overdue working capital limits at various levels
is as under:

To be submitted by Working Capital Limits To be monitored by

Overdue for Renewal/
Review
Small/Medium/Large Rs. 1 lac and above Circle Head
Branches to COs

ELBs/VLBs/ MCBs to CO Rs. 10 lac and above Circle Head

LCBs/COs to CRMD Above Rs. 10 crore GM CRMD

Branch heads should accord personal attention to follow up of all overdue sanctions including
those, which are not to be reported in Statement because of the cut off point, for taking
corrective action.

(A.) Introduction of System of Annual Review of Term Loan Accounts

58
The Term Loan portfolio of the bank primarily consists of long Term Loan to infrastructure
and core sector where the implementation period itself is three years or more. It has been
decided to put in place a system of annual review in case of Term Loans to ensure effective
monitoring. Such review, however, will have no bearing on asset classification and income
recognition of the accounts. The annual review of term loans is to be carried out during
implementation stage and also after implementation. After implementation period, it is
necessary that the position of regular repayment is monitored by reviewing the achievement of
production/sales vis-à-vis projections given for production/sales. Also, any
diversification/expansion of the company, which affects its debt serving capacity, needs to be
reviewed. Such a review should incorporate the position of other banks‟ exposure.

Accordingly, for all Term Loans, other than retail loans, with sanctioned limit of Rs.1 crore &
above, annual review should be done as per the prescribed format. The annual fee for review
of Term Loans shall be as under:

Stage for levy annual fee Rate

(a) During implementation stage 10 paisa per hundred Rupees

(no ceiling)

(b) After implementation 05 paisa per hundred Rupees

(no ceiling

However, in deserving cases, sanctioning authority may consider concession in the annual fee
up to 50% whereas MD & CEO/ED may allow 100% concession.

It is advised that in case where disbursement is being made in stages, the annual review fee is
to be charged on the sanctioned limit whereas in case the sanctioned amount has been fully
disbursed and the repayment has been started, the review charges shall be levied on the
outstanding amount till the account is fully adjusted. Further, the annual review fee should be
charged on the anniversary date.

The position of eligible Term Loan limits overdue for review as on the last day of each quarter
be prepared by the branches as per the format at Appendix-X and submitted to their controlling

59
offices within 7 days of close of the quarter. Circle Offices/LCBs shall submit consolidated
statement in this regard to CRMD within 15 days of close of the quarter.

The details of eligible Term Loan sanctions overdue for review above three months should be
submitted along with the above statement and reasons/ present status/proposed action plan
should invariably be mentioned therein. The monitoring of MIS at various levels shall be done
as under: -

To be submitted by Overdue For Review Monitoring authority

Small/Medium/Large Rs. 1 crore and above Circle Head

Branches to COs

ELBs/VLBs/MCBs to COs Rs. 1 crore and above Circle Head

LCBs/COs to CRMD Rs. 10 crore and above GM CRMD

PROFILE OF BORROWERS

Branches should maintain Profile of each borrower separately specifically mentioning

complete name, contact address, telephone No., activity of borrowers, assets of borrowers,
guarantors and other obligants, details of primary and collateral securities, as per format
available at Appendix-XI. The profile should be updated on quarterly intervals, on an ongoing
basis and preferably be placed as the first page in the file of the borrower. The Controlling
Authorities and other Inspecting Officials during their visit to branches should ensure that
profile on borrowers is maintained and updated regularly.

MAINTENANCE OF LOAN DOCUMENT FILES OF BORROWERS

60
In order to maintain safety of loan documents, the branches should ensure proper paging of all
loan documents. The Page Numbers should be legibly written on upper right side of each
paper/document and the files should be kept in orderly manner.

LIMIT SANCTIONED STATEMENT (LSS)

In terms of extant guidelines, Sanctioning Authorities are required to submit all limits
sanctioned, whether fresh/renewal/reduction/enhancement or adhoc in the prescribed format of
Limit Sanctioned Statement as on the last day of the month to the next higher authority. Since
timely scrutiny of LSS could help in early detection of fraud and facilitate immediate remedial
measures, it is imperative that LSS should be submitted by the branches within prescribed time
and scrutinized promptly by the competent authority.

In this regard, it is stated that LSS report is also available in EDW Server, which could be
utilized by Branch Offices and Controlling Authorities for preparation as well as scrutiny of
the LSS. Branches may extract the LSS report from EDW Server and submit the same to Circle
Office after making necessary modification in it wherever required along with required
Annexure/Appendix. The detailed guidelines in the matter conveyed by HO from time to time
should be referred.

QUARTERLY MONITORING THROUGH REVIEW SHEETS (QRS)

 Our present system for Post-sanction Follow-up and Control of Advances provides for
quarterly review of loan accounts sanctioned by Branch Head as well as Circle Heads and
higher functionaries as on the last day of quarter ending March, June, September and
December except in exempted categories of loan accounts. Branches should submit the
review sheets, complete in all respects within 10 days from the close of quarter, to the
sanctioning authority
 Primary responsibility for scrutiny/processing of Quarterly Review Sheets (QRS) rests with
the Sanctioning Authority. It enables the sanctioning authority to form an opinion about
conduct/ position of the account and operational/financial performance of the Unit.
 The information required to be given in the Review Sheet covers, inter-alia, critical areas
like compliance of terms and conditions of the sanction, position of the various accounts,
data regarding checking of stocks, report regarding serious audit irregularities and financial
information (regarding Sales, Production, Net Profit, Sundry Creditors, Sundry Debtors
and Statutory Liabilities, etc.) for previous and current quarters.
 In case various columns of the Review Sheets give complete and factual information, the
Monitoring Authority can get a very clear idea of the state of account. In actual practice, it
has been observed that the information is not complete, rather evasive and more often than
not, financial information regarding sales, production, net profit, sundry creditors, statutory
liabilities, sundry debtors, etc. for the previous and current quarter is
missing/incomplete/left blank. Clear picture is also not available from the Review Sheet
regarding verification of stocks and/or removal of serious irregularities.

61
 Circle Offices are required to analyse the information given in Review Sheets and pick up
early warning signals, if any, noticed for taking timely corrective steps to maintain proper
health of the concerned borrowers. It is, however, noted that adequate attention is not being
given by the Monitoring Authorities at various levels to the gaps/deficiencies contained in
Review Sheets or warning signals emanating from them. Gaps/deficiencies in the
information continue to be repeated from quarter to quarter.

Branch heads must take personal care to ensure that no material information is left out and
timely remedial steps are taken, wherever necessary.

PREVENTIVE MONITORING SYSTEM (PMS)

PMS Model was implemented across all branches w.e.f. 01/07/2014.The model covers a
number of signals/ indicators, that are material for evaluating the conduct or health of a
borrowal account and seeks to measure the performance of account on said signals on
continuous basis. It is system driven/automated, comprehensive, concise, objective, user
friendly, analytical, speedy and also contains module for monitoring of Project loans.

a) Objectives of PMS

The objective of PMS is to track & evaluate the health of borrowal accounts on a continuous
basis and detect:

 Unsatisfactory/adverse signals/indicators at an early stage in a comprehensive manner.

 Thorough probe into reasons behind observed signals and analysis thereof.
 Speedy corrective/remedial actions/steps to prevent the account from becoming NPA
as well as to minimize the loan losses.

b) Applicability & Periodicity of PMS

PMS is applicable for all Borrowal Accounts availing aggregate limit of above Rs.1 crore. The
system shall be reviewed and may be extended to other accounts for which necessary guidelines
shall be issued from time to time. PMS Report shall be generated by the branches and submitted
in the system on monthly basis. Data for generation of PMS report for a month will be available
in the system by 3rd of next month. Accordingly, BOs shall prepare and submit PMS reports
in the system within 15 days from the close of month and the same shall be downloaded by
officials at CO/ZO/HO for monitoring purpose.

No hard copies are required to be submitted by BOs to controlling offices. However, BOs will
retain one copy of the report duly signed by the Maker, Checker and Branch Head, for their
own record, reference and inspection. The monitoring in respect of PMS reports of borrowal
account shall rest with the sanctioning office i.e. Branch/ Circle/ZO/Head Office.

c) Composition of NEW PMS

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The model has been divided into three parts i.e.

 Conduct of Account
 Compliance of terms of Sanction
 Status of projects under implementation

The compliance module will have 30% weightage while the conduct module will have
70% weightage in the total score. The score under Project Implementation will be added
in the score for Term Loan facility under conduct module.

Scores under the defined parameters are assigned in the range of 0-4. The final score is derived
based on weighted average score of previous three months or current score whichever is higher.
Based on the parameters, benchmarks and weights, system will work out score, cumulative
scores, which shall be translated into one of the 5 PMS Ranks of borrower. PMS Rank indicates
the state of health of an account. The lower the PMS Rank, better the health of account and
vice-versa.

Translation of PMS score in to PMS Rank of the borrower is as under:-

PMS Score PMS Rank PMS Indicator

0 - 25% 1 Healthy
>25% - 50% 2 Satisfactory
>50% - 65% 3 Early Warning
>65 % - 80% 4 Warning
>80% 5 Likely NPA

The guidelines issued by HO from time to time on PMS should be referred .

QUARTERLY MONITORING SYSTEM (QMS)

The system of QMS is in place in the bank for monitoring performance of big borrowal
accounts enjoying working capital facilities (aggregate of both fund based & non fund based)
of Rs.1 crore & above from the banking system. QMS includes the submission of data on the
prescribed formats depending upon the economic activity of the borrower. Under this system
financial and operational information/ data is required to be submitted in two different sets of
formats, namely QMS-I & QMS-II.

QMS-I is required to be submitted quarterly within six weeks from the close of the quarter to
which it relates. It gives information about the operations of unit and its performance for the
quarter vis-a-vis that accepted at the time of sanction, also giving reasons for non-achievement
of sales/production targets.

QMS-II is required to be submitted within two months from the close of half-year to which it
relates. In addition to providing comparative position of actuals vis-à-vis projections accepted

63
at the time of sanction relating to operations of the unit, this form also indicates the `SOURCES'
and `USES' of funds generated by the unit, during half year. Critical analysis of this form can
reveal the diversion of short-term funds for long term uses. Branches should, therefore, give
emphasis to fund flow verification, while analysing QMS-II, so as to ensure that there is no
diversion of funds.

In case of accounts enjoying aggregate fund based and non-fund based working capital limits
of Rs.1 crore & above from entire banking system and where PBF is computed on the basis of
Simplified Turnover Method, in place of QMS Form-I & II a simplified QMS Form as advised
vide L&A circular No.103 dated 12.10.2011 is to be obtained from the borrower within six
weeks of close of every quarter and is to be analysed and put up to the competent authority as
per the existing system and suitable action, if required, should be initiated to safeguard bank’s
interest.

The primary responsibility to ensure regular and prompt submission of the complete
information on the prescribed formats and making meaningful analysis thereof is of the Branch
Head, while the CO/ZO/HO will also be responsible for

overseeing compliance by branches in case of their own sanctions. Bank’s internal

inspectors/auditors shall also look into the compliance with this discipline and give appropriate
comments in their reports.

Based on the suggestions given by Central Statutory Auditors, it has been decided that in case
of new borrowers with aggregate limit of Rs.25 crore & above, the cash flow statement should
be obtained at half yearly basis duly verified by the Chartered Accountants as under:

 Till the first review of limits in case of working capital, and

 During the currency of the loan in case of term loan.

The aforesaid stipulation shall be in addition to the extant prescribed provisions for post-
sanction follow up.

CORRECTIVE STEPS REQUIRED TO BE TAKEN

There should be no laxity in Post-Sanction Follow-up and Control on Advances in view of the
serious deficiencies being pointed out by RBI/Statutory Auditors/Bank's Internal Inspectors
and guidelines on Non-Performing Assets and Provisioning. It is imperative that the following
steps are taken immediately: -

i) The quality of information at present coming in the Review Sheets, PMS and QMS Form
needs to be upgraded substantially. No gaps in the data should be permitted and the information
to be submitted at branch level should be factual and complete so as to give a clear idea to the
Monitoring Authority regarding state of the account.

64
ii) Wherever there is any delay in submission of any data or data given is incomplete or missing,
branches should invariably charge penal interest as per HO guidelines issued from time to time.

iii) Where the default is of serious or persistent nature branch may consider freezing the
operations in the account after giving due notice to the concerned borrower. In case the default
persists despite the levy of penal interest and the branch is satisfied that deterrent action is
called for, the matter may be reported to Controlling Office for freezing operations in the
account on the strength of notice already served on the borrower.

Action on the above lines should be initiated through the Lead Bank in respect of accounts
under formal consortium arrangement.

 All loan proposals falling within the ambit of QMS discipline must also contain an
additional column "Compliance with QMS Discipline" under which it should be
specifically stated whether the borrower is furnishing relevant financial data as
prescribed for QRS/PMS and submitting QMS returns in time and complete in all
respects. Delays/gaps in information, if any, must be specifically mentioned with
corrective action taken.

 At branch level including ELBs/VLBs/LCBs, BMs/CMs/ AGMs/DGMs should keep

themselves informed of the daily operations in the major loan accounts with particular
reference to debit operations. This will give them valuable feedback regarding
utilisation of funds by borrowers.

QUARTERLY INFORMATION SYSTEM (QIS) FORM-I FOR FIXING OPERATIVE

LIMITS.

The following system of fixing Quarterly Operative Limits is in place, especially in big
borrowal accounts, to enable the bank to manage its funds position more effectively and
economically:

 For all borrowal accounts availing fund based working capital credit limits of Rs.5
crore & above from our bank, Quarterly Information System (QIS) Form-I may be
obtained for fixing up of quarterly operative limits in addition to the QMS Forms. QIS
Form-I is to be submitted in the week preceding the commencement of the quarter to
which it relates, in the format available in L&A Cir.no.103 dated 12.10.2011.

 In case of consortium advances, where our Bank is leader, the above system may be
followed. In cases where we are member of the consortium, we may insist for setting
up of quarterly operative limits. However, the supervision system, as adopted by the
Lead Bank, may continue to be followed.

 The QIS-I shall be applicable both for general category borrowers as well as traders
and merchant exporters.

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  Non-adherence to the operative limits will attract penal interest as per the extant
guidelines.

INSPECTION OF STOCKS

 Inspection of stocks at prescribed intervals is not being conducted by many offices. In

several cases, wherever the stocks are lying at outstation offices and/or the factory of
the party is located at a place other than the branch where the account is maintained,
checking is either not done at all or done perfunctorily. The position is also not
satisfactory in respect of consortium advances where checking is to be done by the Lead
Bank or by other consortium members in rotation.
 Monthly/Quarterly inspection/checking may be carried out alternatively by the
Manager and the Assistant Manager/Officer. Whereas checking may be entrusted to the
Assistant Manager/Officer as permitted under the instructions, it shall continue to be
the personal responsibility of the Branch Head to ensure that the checking has been
done in all cases every month/quarter (as the case may be) or as per stipulations made
in the letter of sanction.
 Branches are advised to ensure that securities be checked regularly in all Credit
Accounts (including NPA accounts). During these periodical inspections, the Branch
heads should satisfy themselves that the security is intact both qualitatively and
quantitatively, readily marketable and has not become old or obsolete or deteriorated
in any way. If not, the facts should be brought to the notice of the higher authorities and
instructions asked for.

STOCK AUDIT OF LARGE BORROWAL ACCOUNTS

Bank has a policy to conduct annual stock audit (including book debts) as under:

(i) Annual Stock Audit should be got compulsorily done in respect of all borrowal accounts
enjoying Fund Based & Non Fund Based (NFB) working capital limits of Rs.5 crore and above
from our Bank. All NFB limits, which are being used for Working Capital Funding like LC,
SBLC, BG for purchase of goods for sale and BGs for mobilization Advances are to be included
within threshold limit of Rs.5 crore for stock credit, but Capex LCs, Bid Bond Guarantees etc.
need not be included in NFB limits for the purpose of conducting stock audit.

(ii) In case of borrowers enjoying fund based working capital limits less than Rs.5 Crore also,
Stock Audit may be got done in emergent cases and/or where bank’s interests demand.
However, for modalities of stock audit, prior concurrence of the concerned Circle Head be
obtained.

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(iii) Annual Stock Audit should be compulsorily conducted in all “B2‟ to “C3‟ rated accounts
and NPA accounts enjoying fund based and non-fund based working capital limits of Rs. 3
crore and above.

In case of Consortium/Multiple Financing, where the borrower is enjoying working capital

limits (fund based) of less than Rs.5 crore from our Bank and Rs.20 crore and above in
aggregate from the banking system, branches should take up with lead bank/major share-holder
banks in multiple banking arrangement for getting the stock audit conducted.

In respect of consortium advances, where we are the leader, stock audit may be got conducted
with consent of member banks and in cases where we are not the leader, we may take up the
matter with the Lead Bank for getting the stock audited of borrowal account. Final decision
regarding stock audit in the account shall, however, be based on the consensus amongst the
member banks.

For disposal of Stock Audit Reports in such accounts, following guidelines must be kept in
view:

(a) In the case of consortium accounts where we are the Lead Bank, the matter should be
pursued with the Stock Auditor for submission of stock audit report immediately after
completion of stock audit. The report should be scrutinized and important observations and
action points emerging from stock audit should be circulated to other member banks and the
same should be thoroughly discussed at the next consortium meeting.

(b) In the case of consortium accounts where we are a member bank, it should be ensured that
the Stock Audit observations are independently analysed/scrutinized and taken up with the
Lead Bank for discussion in the next meeting.

If the Lead Bank is not forthcoming with effective follow up action on receipt of the report,
matter should be taken up with the company directly for initiating corrective measures on
action points emerging from the stock audit. Circle Heads may take a view in this regard on
case to case basis to safeguard bank’s interest.

VERIFICATION OF GENUINENESS OF THE SIGNATURES OF CAS/FIRMS

It has been observed that in some cases of high value frauds, fraudsters succeeded in getting
manipulated/fake document accepted which ultimately resulted in loss to the bank. As such, it
has been decided that the confirmation about the

genuineness of the signatures on the documents be sought from the concerned CA/Firm.

Accordingly on receipt of the financial information/documents signed by Chartered

Accountants/Firms, the status of membership and address of the Chartered Accountants/Firms
should be ascertained from the Website of the Institute and subsequently confirmation should
be sought from the concerned Chartered Accountants/Firms about the genuineness of the
signatures affixed on the financial information/documents submitted by the borrower to the
bank to ensure their authenticity. A list of members containing names, address, membership
no. and status of the membership is available on the Institute’s Website (http://www.icai.org)

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under the heading “Member Directory Search – As On Date” and the search can be made on
the basis of both membership no. or name of the member.

As such, it is advised that while dealing with the reports submitted by CAs, the genuineness of
the signatures of CAs/or firms may also be verified from the Regional Office of the ICAI under
whose jurisdiction the CAs/firm in question falls to avoid any serious implications for the Bank
due to such fake reports. Further in case false documents as aforesaid have been noticed,
suitable action may be initiated against the parties involved such as filing of FIR etc. under
intimation to concerned CAs/firm of CAs.

There have been instances of using signature/stamp of deceased CAs, which leads to doubt the
audit reports signed by the CAs/firms of CAs. Since the reports submitted by CAs play a vital
role for making credit decisions both at the pre sanction appraisal and post sanction follow up
stages, it is imperative that the reports should be correct and based upon the facts. The
information obtained from the borrower by way of certificate by the Chartered Accountant
should be duly verified from the books of the party/other sources to ensure its correctness
beyond doubt. As a matter of prudence, Bank needs to ensure end-use of funds it has lent and
should not depend entirely on the end-use certificates issued by the Chartered Accountants to
enhance the quality of the loan portfolio.

ENACTMENT OF COMPANIES (AMENDMENT) ACT, 2000 – IMPLICATIONS OF

INSERTIONS OF NEW SECTIONS 58 AA & 58 AAA FOR BANKING COMPANIES

The sections (Section 58 AA) and (Section 58 AAA) have been inserted in the Companies Act
1956 by Govt., which deal with protection of “small depositors” i.e. those who have kept a
deposit with the Companies for amount, less than Rs.20,000/-.

In order to safeguard bank’s interest, while sanctioning the working capital to the corporate
borrowers, following measures need to be taken:

i) Branches should obtain a certificate from Statutory Auditors of the Company that the
Company has not defaulted in payment of interest/principle to small depositors and that the
Company has complied with the provisions of Section 58 AA of the Companies Act 1956.

ii) As part of ongoing monitoring of account, branches should verify if the Company has filed
any notice of default with the Company Law Board in terms of section 58 AA.

iii) An undertaking from the corporate borrowers should be obtained at the time of entering
into the agreement for granting working capital that they have no outstanding dues towards the
small depositors (deposits of less than Rs.20,000/-).

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DIVERSION OF FUNDS

It is also observed that diversion of funds through inter-company investments or by utilization

of short-term funds for meeting long-term outlays is quite common these days. More often than
not the Bank comes to know of this adverse feature on submission of audited annual Balance
Sheet and Profit & Loss Accounts, which are received after 6-9 months from the close of the
relevant accounting year. Bank cannot afford to wait for such a long time and should be able
to detect this adverse feature through close scrutiny of data thrown up in QMS forms.

The branches to obtain a certificate from the borrowers availing working capital limits of
Rs. 25 lac & above, on a quarterly basis furnishing details of accounts opened with the other
banks, if any, along with the statement of accounts.

In an effort to track the fund flow and end use of funds, branches should monitor the working
capital accounts of the companies to check the diversion of funds with special emphasis on end
use verification. Further, for monitoring of borrowal accounts, more emphasis be given to cash
flow verification. The quality of bills discounted requires improvement and discounting of
accommodation bills should be avoided.

VALUATION OF IPS/MACHINERIES

In valuation of IP and machinery deficiencies have been observed in some

accounts. Branches should get the valuation of IPs done from the valuers on the
approved panel of the Bank and as per the guidelines issued by Head Office from
time to time.

UPDATION OF COLLATERALS IN CBS

RBI Officials, during Annual Financial Inspection of the Bank for FY 2015-16, have observed
that in a number of cases updation of valuation of collaterals in CBS System have not been
done.

In order to ensure that the updation of collaterals especially in case of Immovable Properties
(IPs) mortgaged to the Bank and kept as Primary Securities or otherwise are valued and updated
in CBS System at prescribed intervals, a new menu option (“CLM”) has been customized
which is applicable for new as well as existing accounts for capturing the details of IPs.
Operational guidelines are advised vide L&A cir.no.14 dated 13.02.2017 and subsequent
circulars issued on the subject from time to time.

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MONITORING OF BORROWAL ACCOUNTS

There is urgent need to strengthen monitoring system at all levels to contain rising slippages to
stressed assets. Monitoring of borrowal accounts should not be a customary one-time exercise
during the month\quarter, but it should be a vigorous ongoing process. The vital task of
monitoring should not be restricted to the Branch Head but the Entire Team should be involved
in this process in order to maintain healthy credit portfolio.

In order to have effective monitoring mechanism for timely service of interest and principal by
the borrowers for ensuring the asset quality, the following measures be initiated.

1. Statement of irregular accounts be drawn regularly as per the guidelines by the branches
and irregular accounts be pursued from Day One to recover the overdue amount.
2. Branch heads should ensure that installments and/or interest are recovered as and when
they fall due, the borrowers are followed up for recovery without any loss of time and
accounts are regularized at the earliest.
3. Branches to ensure that wherever our Bank is a Sole Banker, the borrower should deal
with us exclusively and all sale proceeds should be routed through our accounts.
4. Wherever our Bank is a member of the Consortium or credit facilities have been
provided under Multiple Banking Arrangement, branches to ensure pro-rata sales are
routed through our accounts.
5. Branches to ensure that in no case, the borrower opens accounts outside the consortium
and routes the sale proceeds through such accounts.
6. Branches are advised to identify the reasons of the accounts becoming irregular and
necessary measures be initiated for ensuring that the accounts are regularized and
continue to remain standard assets.
7. While monitoring and reviewing irregular accounts, statement of the borrowal accounts
and current accounts be also drawn and examined to ensure healthy operations and
requisite credits are there in the account in proportion to the sales turnover.
8. The branches should monitor the cash credit\overdraft accounts vigorously ensuring
that they do not remain out of order continuously for more than 90 days lest they
become stressed assets.
9. For ensuring that the accounts remain regular and maintaining asset quality, repayment
of installments should be as per cash flows and in line with the industry trends of
revenue\receipts inflows.
10. It should be ensured that MSME advances are correctly categorized as per their
respective codes.
11. Branch heads to ensure that correct repayment schedule is fed in the CBS system and
the same is not allowed to be changed without authority.

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 Chapter - 4
ANALYSIS

4.1 LAPSES IN LOAN ASSET

MANAGEMENT

1. SELECTION OF THE BORROWERS

 A large number of applicants engaged in same/similar activities have been selected

 Majority of the applicants concentrated in one pocket/street/shopping complex
 Bulk of the applications has been filled in by the same person, going by the style of
handwriting and language found on such applications.
 At many places, borrowers have been brought to the bank by intermediaries.
 Bank staff themselves have visited all shops and small business establishments in the
vicinity and offered loans to them to beat the deadline. Since the lenders themselves came
forward to offer loan, without the borrowers asking for it, bankers have made themselves
cheap and also vulnerable
 Applicant does not possess the professional skills required for carrying out the proposed
activity (e.g. Tailoring, Beauty Parlor, Software Solutions, Transport Operator etc.)
 Applicant does not have valid licence/statutory approval to carry on the proposed activity
(e.g. Medical Shop, full fledged Hotel/Restaurant, Departmental Stores etc.)
 Same borrower has been assisted twice for the same activity and purpose under MUDRA
 More than one member from the same family assisted under PMMY/MUDRA
 Two different units engaged in the same activity and located at the same address considered
for assistance, resulting in double finance
 Existing borrowers having limits under Term Loan, SOD or OCC have been sanctioned
MUDRA loans, despite the fact that they have mortgaged their immovable property for
their first loan
 Even small units located at distant/far away places selected for assistance, without thinking
about the difficulties to be faced in regard to monitoring and follow up.

2. APPLICATION

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 Line of Activity and Purpose of Loan not filled in by the Applicant
 Facility sought has not been stated in the application
 Loan amount applied for has not been expressly mentioned in the application
 Quotation / Proforma Invoice not attached to the application
 Many quotations were from the same vendor or a few vendors, regardless of the activity of
the applicants
 Affidavit from the applicants stating they have no loans from other banks/financial
institutions and they are/were never defaulters to any banks/financial institutions has not
been obtained.

3. PRE-SANCTION

 Unit Inspection not conducted for existing units.

 CIBIL Report (Individual and Commercial) not generated for limits of Rs.2 lakhs and
above.
 Credit Investigation /Due Diligence was not done, at least for loans beyond Rs.50,000.

Indian banks have been struggling with NPAs for the past few years and have seen bottom lines
plunging consistently – quite a few loans were given out without proper diligence. The RBI
had to step in to stem the rot and ensure that the dues are recovered. The direct involvement of
RBI was essential to tackle the alarming situation and eradicate the malaise.
In the worst ever financial crisis since 1991, bad loans in India grew to Rs. 3,41,641 crore in
September 2015, striking at the root of India’s Rs. 95 trillion banking sector. Total Non-
Performing Assets (NPAs), as a percentage of the total loans, has grown from 2.11 to 5.08
percent.
One out of seven bad loans at India's public sector banks is due to a willful default. Of the
₹7.33 lakh crore worth of non-performing assets (NPAs), around ₹1.01 lakh crore, or 14
percent has been caused by willful defaulters. This is what a The Times of India report say’s
citing RBI data.

Among public sector banks, Vijaya Bank tops the list with more than one in two bad loans due
to a willful default, while Punjab National Bank has the highest share of wilful defaulters
among bigger banks. About 77% of gross NPAs in India's domestic banking system are
concentrated with the country's top corporate houses. Eight out of 10 banks featuring on the
list are from the public sector. The banking system is on the verge of a crisis. Stocks of state-
run banks had to bear the brunt, which went into a free fall. The crisis is huge and there is no
end in sight. No wonder, the diktat from the RBI.

According to a survey by global research firm Ernst and Young (E&Y) among Indian bankers,
87 percent said that NPAs occurred due to diversion of funds to unrelated business or, put into
simple words, fraud. A further 64 percent attributed them to lapses in due diligence. Around
72 percent of the survey respondents were of the view that the crisis is set to get worse.
Most of the bankers feel that the main problem is that banks can’t monitor and check
the finances of an enterprise thoroughly as they have no visibility into its operations. Although
banks do ask for a number of documents to sanction a loan, they are found fumbling as far

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as real-time transactions of an enterprise are concerned, since they don’t have access to
its financial records or the feasibility of projections. The data that the banks have is not enough
to authenticate claims, making them ill equipped to take decisions based on solid facts.
The 7 May 2015 RBI circular on “Framework for dealing with loan frauds” was supposed to
bring banks in line with monetary discipline. According to the circular, banks now need to
ensure strict monitoring of the finances of an enterprise both pre- and post-sanction. They will
have to fortify their internal processes to ensure the funds undergo due diligence. While the
RBI and bankers are doing their best to resolve the issue, measures have to be in place to
perceive, report and alleviate such risks.
Recently, the Government of India has passed an Ordinance empowering the Reserve Bank of
India (RBI) to speed up the bad loan recovery process. The decree empowers the RBI to
directly intervene in order to settle cases. Non-Performing Assets (NPAs) recovery will be
executed, particularly in those cases where a consortium of lenders lent to one corporate group.
The Government says the Ordinance will cover 70 percent of stressed assets cases.

4. APPRAISAL

 Rating in case of limits of Rs.2 Lakhs and above not done

 Process Note has been left blank/incomplete or it is not on record
 Economic viability of the activity/unit has not been discussed even briefly in the
process note
 Appraisal Note has not been signed by bank officials
It may be due to either of these reasons:

 Process note was also filled in by an outsider and brought to the bank along with
the loan application
 Fear in the minds of the bank officials who processed and sanctioned the loan about
accountability in case of probable default.

5. SANCTION

 Sanction letter is not available on record

 Sanction letter is very vague and it does not even contain basic and essential terms and
conditions
 Bank has sanctioned loan for some purpose/activity that is entirely different from the
one stated in the application
 Borrower has not acknowledged and accepted the sanction terms and conditions
 Limit sanctioned does not have any relevance to the activity of the borrower. For
instance, street hawkers selling vegetables, fruits, flowers, milk (having no permanent
place), roadside idli shops etc. have been sanctioned loans that are disproportionate to
their actual need. The loan amount in such cases is many times higher than their
monthly sales turnover.
 Already existing units have been granted loans against their old machinery and
equipment. Loan amount in such cases has been credited to the borrower’s personal
account.

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  Many parties have been allowed to ‘top up’ their existing limit under the same scheme
within a short span of time, without proper rationale and justification. This is done with
a view to show a larger number of sanctions than what is done in reality. This step is
resorted to, probably as a part of ever-greening exercise, to prevent the loans from
slipping down to NPA.

6. DOCUMENTATION

 All the required documents have not been obtained

 Documents have been left blank/incomplete
 Stamping was not done/Stamps affixed have not been defaced with signature and date
of the manager or a competent person/authority

7. DISBURSEMENT

 Borrower’s margin was not ensured

 There is no documentary proof for the advance purportedly paid by the applicant to the
vendor
 Full/major part amount of the loan has been credited to the borrower’s CD/SB account
 Proper bills have not been obtained
 Where the bills are available, many such bills are scribbled on a piece of paper or
handwritten on cash memos that do not bear any Serial Number, Date and Address of
the vendor
 Bills are dated prior to the date of sanction of the loan (bills are several months or even
a year old).

8. POST SANCTION

 Unit inspection was never conducted after the loan was disbursed
 Insurance of the assets created out of bank funds has not been done
 CGTMSE coverage has not been done.
 For a branch of the age and size of a particular bank branch, disproportionately large
number of loans has been sanctioned under PMMY/MUDRA, making the follow up
difficult and unmanageable

9. OTHERS

 Many bank staff do not understand the basic lending principles. They do not attach
much importance to the standard procedure to be followed for prudent lending.
 Due to pressure from the higher officials, many banks have received, processed
and sanctioned a large number of proposals on a single day. Disbursement of the

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 loan was also done the same day or the following day. This has lead to a lot of
deficiencies, lapses and irregularities.
 Loans have been sanctioned to individuals like housewives, drivers, watchmen,
ATM security guards, Tea boys, temporary staff and others. In such instances, there
was no tangible asset created and the loans are 100% clean and unsecured.

4.2 RESTRUCTURE OF LOAN ACCOUNTS

The quarterly financial results of various public sector banks have shown losses. This has been
a result of large Non-Performing Assets (NPAs) in their loan books. If you are just wondering
what is an NPA, it is that loan which has failed to pay its installments even after 90 days of
such installment becoming due. While RBI categorizes loans into various complex categories
and has different NPA classification criteria for them, we are sticking to the most basic
definition for the sake of simplification. Considering the visible stress in such overdue
accounts, RBI also asks banks to make a provision for loss against such NPAs starting with
15% of the loan outstanding on the very first day of such loan being classified as NPA.
However, there may be times when the borrower is unable to pay the installments due to some
genuine financial issues or just because of cash flow mismatches. In such a case, the borrower
can approach the bank to restructure the loan taken. Bank will then evaluate the restructuring
proposal in terms of its viability and then take a decision accordingly. If it is convinced that
the existing stress in the loan can be addressed by restructuring the loan suitably, bank will
approve such a restructuring and make an effort in putting life back into the loan.

Ways of restructuring loan:

Rescheduling the Loan Repayment

The borrower can offer to just restructure the loan repayment schedule to match the operational
cash flows. There might be situations when the business goes through long operating cycles
and the cash flows may be skewed to some specific months instead of being spread evenly over
the year. Similarly, the cash inflows may be lower in the earlier years but higher during the
later years of the project. As such, rescheduling the loan repayment can help tide over such
genuine operational issues.

Reducing the Interest Rates

It may so happen that the interest rate at which the loan had been taken is higher than what it
ideally should be. This change may have happened due to some regulatory changes or changes
in the market for the product. Higher interest rates are not desirable and thus, the borrower may
approach the bank to reduce the interest rates so that the loan continues to be in good standing.
Reduction in the interest rates directly impacts the project cost favourably making it viable.

Waiver of Overdue Interest

The borrower may not have paid a couple of installments due to genuine financial issues. As a
result of such default, banks generally charge some delayed/overdue interest to compensate for
such delay. Such cost directly adds to the project costs. Further, bank policies are such that
they generally adjust the overdue interest first at the time of regular installment. Hence, the

75
borrower enters the vicious circle of some amount remaining overdue always and causing the
overdue interest to continue increasing. In case the borrower makes regular payments
subsequently, he can also approach the bank for waiver of overdue interest. Considering better
and regular repayment history, banks are inclined to waive such amounts to encourage the
borrower to stay regular in repayment.

Helps in favourable credit scores for the customers :

Restructuring aims at taking care of stressful loan accounts for genuine borrowers. The
restructured loan takes into consideration the repayment issues along with operational
difficulties for the borrower which is causing the account to stay overdue. An overdue loan will
impact the credit score adversely as the amounts stay overdue on a continuous basis. As such,
restructuring of bank loan will generally help eliminate such overdue amounts and hence,
impact the credit score favourably.

4.3 RECOVERY MECHANISM

MANAGEMENT OF NPA AND RECOVERY

CLASSIFICATION OF NPA

Banks are required to make sub standardization of the non-performing assets (NPA) into the
following type of four broad groups: –

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STANDARD ASSET

Standard assets are those assets which have remained non-performing assets for a period of 12
months or less than 12 months and the risk of the asset is normal.

SUB-SATANDARD ASSET

For a period of more than 12 months, non-performing assets are classified under sub-standard
assets. Such kind of advances possess more than normal risk and the creditworthiness of the
borrower is quite weak. Banks are generally ready to take some haircut on the loan amounts
which are categorized under this asset class.

DOUBTFUL DEBTS

For a period which is exceeding 18 months, non-performing assets come under the category of
doubtful debts. Doubtful debts itself means that the bank is highly doubtful of the recovery of
its advances. The collection of such kind of advances is highly questionable and there is the
least probability that the loan amount can be recovered from the party. Such kind of advances
put the bank liquidity and reputation at jeopardy.

LOSS ASSET

The final classification of non-performing assets is loss assets were the loan has been identified
either by the bank itself or an External Auditor or internal auditor that the loan amount
collection is not possible, and a bank has to take a dent in its balance sheet. The Bank, in this
case, has to write off the entire loan amount outstanding or need to make a provision for full
amount which needs to write off in future.

RECOVERY AND ITS TYPES

Calculation of recoverable dues recoverable dues shall be calculated w.e.f. the date of NPA on
the book outstanding as existing on the date of NPA (inclusive of si/di reversed subsequently)
duly adjusted for recoveries/further debits in the account, ignoring the interest, if any
credited/debited in the account after the date of NPA on simple basis on daily reducing balance
@ base rate or contractual rate of interest, whichever is lower as prevailing on the date of
consideration of proposal. this will be done in all cases irrespective of the fact whether recovery
was appropriated towards income/reduction in outstanding/recovery of expenditure out of
pocket expenses. the interest/charges, if any debited to the account after classification of
account as NPA be netted off from the recoverable interest to give effect to the correct
calculation of simple interest.

Banks are empowered to evolve and formulate their own recovery policy for non-performing
loans and technically written off accounts held in shadow register. Timely recovery of loans
and advances not only increases safety, liquidity and profitability of the bank but also keeps

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the fund-cycle moving by continuous lending in an appropriate manner. The basic concept of
Recovery policy is to frame guidelines with a view to recover Banks dues and encourage
compromise settlements whenever warranted and accelerate recoveries within a reasonable
period so that the funds can be recycled for the best use. Recovery of NPAs and technically
written off accounts through various recovery measures including compromise settlements is
an important task of the Bank. With a view to achieve the desired results, proper
implementation of the policy guidelines is of paramount importance.

The curative measures are designed to maximize recoveries so that banks funds locked up in
NPAs are released for recycling. The Central government and RBI have taken steps for
controlling incidence of fresh NPAs and creating legal and regulatory environment to facilitate
the recovery of existing NPAs of banks. They are:

ONE TIME SETTLEMENT SCHEMES

This scheme covers all sectors sub – standard assets, doubtful or loss assets as on 31st March
2000. All cases on which the banks have initiated action under the SRFAESI Act and also
cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the
Courts/DRTs/BIFR are covered.
However cases of wilful default, fraud and malfeasance are not covered. As per the OTS
scheme, for NPAs up to Rs. 10 crores, the minimum amount that should be recovered should
be 100% of the outstanding balance in the account.

Basic guidelines for Compromise settlement should be as hereunder:

(a) It should be negotiated settlement to ensure recovery of dues to the maximum extent
possible at minimum expense and within shortest possible time frame.

(b) It can be negotiated with Principal borrower, Guarantors, Parent Company, Other
interested parties like legal heirs etc.

(c) While considering Compromise settlement, a proper distinction will have to be made
between wilful defaulters and non-wilful defaulters.

(d) While considering compromise proposals, the realizable value of security available in
the account shall be assessed for which proper weightage has to be given to the
location, condition, marketability and whether the property is self occupied or tenanted
etc.

(e) Due weightage is to be given to the present activities of the borrower/ guarantor and
their present net worth etc.
(f) While arriving at a negotiated settlement ,the advantage available to the Bank from
prompt recycling of funds should be weighed in comparison to the likely
recovery by legal or other protracted course of actions
(g) In any case the settlement amount should not be less than the Net Present Value (NPV)
of the realizable value of available securities net cost of realization.. If the amount is
paid in instalments, the NPV of the settled amount should be calculated and this amount

78
 should not be less than the NPV of realizable securities. The NPV is to be
calculated by discounted cash flow method at Base rate.

(h) Staff accountability shall be examined expeditiously, with in a specific date line say 2
months from the date of NPA. Generally no settlement can be made without examining
staff accountability.

LOK ADALATS

 Lok Adalats are constituted under “ The Legal Services Authorities Act, 1987”
 Lok Adalats have been constituted at various places in the country for disposal of
disputes in a summary way and through the process of arbitration and settlement.
 Functioning of the Lok Adalat is entirely voluntary and conciliatory.
 As per sec 2 of the Legal Services Authorities Act,1987,”Lok Adalat” means Lok
Adalat organised under Chapter VI of the Legal Services Authorities Act,1987.
 Chapter VI contains:
(a) Organization of Lok Adalats (Sec 19)
(b) Cognizance of Cases by Lok Adalats (Sec 20)
(c) Award of Lok Adalat. (Sec 21)
(d) Powers of Lok Adalats/Permanent Lok Adalat. (Sec 22)
(e)Pre-Litigation Conciliation and settlement (Sec 22)
(f) Members of Lok Adalats shall be deemed to be public servants within
meaning of section 21 of the I.P.C.
(g)Protection of action taken in good faith (Sec 24 of the Act).
 The awards passed by the Lok Adalats are enforceable like the decrees of Civil Court
and are binding on the parties to the dispute.
 These awards are final as there does not lie any appeal against an award passed by a
lok Adalats.
 The legal Services Authorities Act, 1987 as amended upto 2002 enables the
establishment of Permanent Lok Adalats in every district for pre-litigation, conciliation
and settlement in respect of disputes of Banks and FIs.
 Cases involving an amount upto Rs.20 lacks may be referred to Lok Adalat and the
progress report in every quarter is to be sent to RBI by CBs.
 Lok Adalat settles cases on the spot.

DEBT RECOVERY TRIBUNALS (DRTS)

 The provision of this act is applicable only in respect of debts due to any bank or
financial institution for an amount of Rs.10 lacks or above.

 DRT is headed by a Presiding Officer who has been or is qualified to be a District Judge
as per sec 5 of the Act

 DRT has one or two Recovery Officers, who need not have judicial background but
orders passed by them are judicial in nature and are appealable before the presiding
officer of the tribunal.

79
  All recovery proceedings in respect of debts amounting to Rs.10 lacks and above
coming under the jurisdiction of the tribunal will be referred to it and no other court
will have the authority to hear the cases which falls within the jurisdiction of the tribunal
(Sec 18 of the Act)

 The cases can be filed by the Banks and FIs to a DRT in whose jurisdiction cause of
action has arisen i.e. where the defendants reside or their work place located.(Sec 19 of
the Act)

 The procedure for filing suit is laid down in section 19 of the RDDBFI Act, 1993.

 All the documents supporting the claim of the Bank e.g. loan documents, security
documents, statement of accounts and other material documents must be enclosed along
with the application together with application fees (as per rule 7).

WRITE-OFF

OTS/WRITE OFF IN WILFUL DEFAULT/BORROWAL FRAUDS/CRIMINAL ACTION

CASES

 In cases of Willful Default/Fraud (as reported to RBI) and/or cases where Bank
or other outside agencies like Police/ CBI has/have initiated
investigations/criminal action, as far as possible, efforts should be made to
recover the entire amount of the loan. This is necessary to ensure that a person
committing fraud is not allowed to benefit from commission of such fraudulent
acts.
 However, where it is not possible to recover the full amount and the borrower
is coming forward to offer settlement, all such proposals shall be considered on
case to case basis only as a commercial decision. While negotiating the offer, it
must be made clear that recovery of the loan taken by the borrower and the
criminal action for the fraud committed by him are two separate and distinct
matters.

Bank’s commercial decision to accept OTS offer/recovery of entire outstanding amount

shall have no bearing whatsoever on the ongoing criminal cases/investigation being
carried out by the CBI/Police and the same shall proceed as per law.

 In case compromise agreement is reached with such borrowers or consent

decree is obtained from the Court/DRT, the same would contain a specific
clause that the settlement is subject to continuation of criminal proceedings
against the borrowers/ obligants, which cannot be withdrawn by the Bank as
such cases are on behalf of the ‘State’ and not on behalf of ‘Bank’.
 Bank officials called upon as witnesses by the court shall not unwittingly depose
that the matter has been compromised. They must depose in terms of the
agreement executed/consent decree obtained and clear the position that
although the bank has accepted the settlement proposal given by the borrower,
there is no settlement with regard to the criminal proceedings initiated against
the borrower.

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  Powers to consider OTS in Willful Default/Frauds (RBI Reported)/Criminal
action cases shall be as under:-

 11.5.1 The criminal cases filed under Section 138 of Negotiable Instrument
Act shall not be governed by these guidelines and OTS proposals in such
cases shall be dealt in normal course as per vested powers.
 After lodging of FIR/criminal complaint, if the case stands closed by
Police/Investigating Agency/Court and no investigation is pending, OTS
proposals in such cases shall be considered in normal course as per the
vested powers.
 All such cases approved at the level of COCAC OR HOCAC Level II shall
be placed to Management Committee on quarterly basis for post facto
information.
 Powers to consider OTS in Willful Default/Frauds (RBI
Reported)/Criminal action cases shall be as under:-

A. Cases, where OTS offer is higher than NPRV/Book O/s (whichever is higher)

COMMITTEE BOOK (BALANCE) OUTSTANDING

COCAC Up to Rs. 75 lacs

ZOCAC More than Rs. 75 lacs upto Rs. 115 lacs
HOCAC - I More than Rs. 115 lacs upto Rs. 150 lacs
HOCAC - II More than Rs. 150 lacs upto Rs. 300 lacs
HOCAC More than Rs. 300 lacs upto Rs. 500 lacs
MC/BOARD More than Rs. 500 lacs (Full Powers)

B. Cases, where OTS offer is lesser than the NPRV/Book O/s

COMMITTEE BOOK (BALANCE) OUTSTANDING

(REVISED LIMITS)

ZOCAC Up to Rs. 75 lacs

HOCAC - I More than Rs. 75 lacs upto Rs. 115 lacs
HOCAC- II More than Rs. 115 lacs upto Rs. 150 lacs
HOCAC - III More than Rs. 150 lacs upto Rs. 300 lacs
MC/BOARD More than Rs. 300 lacs (Full Powers)

81
Note-1
It is clarified that the above limits are book outstanding in the eligible accounts which are
mentioned to categorize/identify the competent authority to permit OTS, whereas the powers
to permit sacrifice in an OTS will continue to be the vested powers only, as mentioned in the
Annexure- Decision Levels/Powers of the above mentioned circular.

Note-2
Further, in case as per book outstanding in a willful/fraud account, if OTS falls under a
particular authority as per tables given above, but the sacrifice amount falls under a different
(higher or lower) authority as per Power Chart (Annexure- Decisions Levels/Powers) given in
the General OTS Policy, then the powers to approve/sanction OTS will be vested with the
higher of the two authorities only.

 Powers to consider write off in such cases will be as under

Write off is purely an internal exercise and obligants are in no way released from their liability
towards bank. Therefore, write off of wilful defaulters/fraud cases/cases where bank or other
outside agencies like police/CBI have initiated investigations/criminal action and such
investigations/criminal actions are yet to be concluded may be considered at the level, as per
the Table given above at Para 11.5.4 as per the powers

delegated subject to the following:

1. (a) Write off of an account should be without prejudice to the recovery proceedings

and criminal proceedings pending with Court/DRT/CBI which in any case be

followed up till their logical conclusion.

2. (b) In all Fraud related proposals being put up for write off, it must be ensured that all

other efforts for recovery stand exhausted.

3. (c) After write off of an account closure of the related files should be considered by
HO

(FRMD) only after all other laid down criteria have been complied with.

 It shall be ensured that the staff accountability has been initiated before considering OTS
and finalized before considering Write off in such accounts involving Willful
Default/Borrowal Frauds/Criminal action, otherwise the same shall be treated as a
Deviation case.

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 4.4 ANALYSIS OF LOAN FILES

CASE -I.

COMPANY NAME- ABC LTD.

PROJECT COST & MEANS OF FINANCE

(Rs in Lakhs)
PARTICULAR PROJECT ELIGIBLE BANK LOAN PROMOTER
CONTRIBUTION
COST % AMOUNT
1. Factory shed - 0.00% - -
2. Plant & Machinery 442.24 75.00% 331.68 110.56
3. Computers, Printers & Software 2.16 75.00% 1.62 0.54
4. Electrical Installation & other Fixed Assets 31.72 75.00% 23.79 7.93
5. Furniture Fixture & Fitting 5.00 75.00% 3.75 1.25
6. Contingencies @2% 10.00 0.00% - 10.00
7. Security Deposits including Load security 3.00 0.00% - 3.00
8. Preoperative Expenses 7.10 0.00% - 7.10
9. Working Capital Margin 5.00 0.00% - 5.00

TOTAL
BANK LOAN SOUGHT 506.22 360.84 145.38
Overall %age of Loan & promoters contribution
506.22 360.00 146.22

100.00% 71.12% 28.88%

The ABC LTD. Company was came into picture in the year 2018, the company was eligible
to get loan upto (71.12%) of the cost amount rest of amount were contributed by the
promoters which is (28.88%), Usually banks maximum permissible amount give for loan
upto 75% and the rest of the amount has to be contributed by the loanee itself. In this
company the company was eligible to get amount upto Rs 506.22 lakh it’s the cost for
setting up the business as mentioned above in Rs 360.84 lakh were provided by the in the
form of term loan for a period of 7 years.

83
 BLANCE SHEET OF ABC LTD.

LIABILITIES YEAR
2018 2019 2020 2021 2022
CURRENT LIABILITIES

1.
Short term borrowing from Banks (include.
bills purchased, discounted excess borrowing
placed on repayment basis)
i. From applicant Bank 100.00 100.00 100.00 100.00 100.00
ii. From other Bank - - - - -
iii. (of which BP & BD)
SUB TOTAL (A)
100.00 100.00 100.00 100.00 100.00

2. Long term borrowing from others - - - - -

3. Sundry creditors (Trade) 37.85 40.82 42.97 46.02 48.88
4. Advance payments from customers/deposits - - - - -
from Dealers
5. Provision for taxation
- - - - -
6. Dividend payable
- - - - -
7. Other statutory Liabilities( due within one year) - - - - -
8. Deposits/Installments of term 84.00 84.00 84.00 84.00 -
Loans/DPGS/Debentures(Due within one
year)
9. Other current liabilities & provision( Due
within 1 yr.)(specify major items) 1.36 3.61 3.86 4.11 4.36

SUB TOTAL (B) 123.21 128.43 130.83 134.13 53.24

10. TOTAL CURRENT LIABILITIES: 223.21 228.43 230.83 234.13 153.24

TERM LIABILITIES
11. Debentures (not maturing within one yr.)
- - - - -
12. Preference share - - - - -
13. Term loan(exclude Instalments payable within 252.00 168.00 84.00 - -
one yr.)
14. Deferred payments credits - - - - -
15. Term Deposits (repayable after one yr) - - - - -
Unsecured loan
16. Other term liabilities
-

17. TOTAL TERM LIABILITIES : 252.00 168.00 84.00 - -

18. TOTAL OUTSIDE LIABILITIES(Item 10 475.21 396.43 314.83 234.13 153.24

plus Item 17)

NET WORTH

19. Ordinary Share Capital/Owner’s capital 305.19 383.59 444.39 525.32 622.72
20. General reserves
21. Others (specify) (U/Loan)
22. NET WORTH :
305.19 383.59 444.39 525.32 622.72

84
 CHAPTER- 5
RBI INSPECTIONS AND AUDITS
5.1 STATUTORY AUDIT AND RBI GUIDELINES

85
  A statutory audit is a legally required review of the accuracy of a company's or
government's financial statements and records.
 An audit is an examination of records held by an organization, business, government
entity, or individual, which involves the analysis of financial records or other areas.
 The purpose of a financial audit is often to determine if funds were handled properly
and that all required records and filings are accurate.
 Firms that are subject to audits include public companies, banks, brokerage and
investment firms, and insurance companies.

A. Norms for the empanelment of audit firms to be appointed as statutory branch

auditors for Public Sector Banks (2016-17)

No. of CAs
No. of partners
exclusively
exclusively Standing of
associated Professional Bank audit
associated with the audit
with the firm staff experience
Category the firm (full firm
time) (Out of 2)
(Full time)
(4) (6)
(2) (3) (5)
(1)
The firm or at least one
of the partners should
have a minimum of 8
years experience of
I. 5 3 8 8 years
branch audit of a
nationalised bank and/
or of a private sector
bank.
The firm or at least one
of the partners should
have preferably
conducted branch audit 6 years (for
II. 3 2
of a nationalised bank the firm or at
6
or of a private sector least one
bank for at least 5 partner)
years.
The firm or at least one
of the CAs should
have preferably 5 years (for
III. 2 1
conducted branch audit the firm or at
4
of a nationalised bank least one
or of a private sector partner)

86
 bank for at least 3
years

2
IV. 2 3 years
2
Not necessary
Even proprietorship concern
without bank audit experience
may be considered as hitherto.

B. PROCEDURE FOR APPOINTMENT OF STATUTORY BRANCH AUDITORS IN

PUBLIC SECTOR BANKS

1. The norms for selection of branches of PSBs for statutory audit from the year 2016-17 and
onwards will be based on the following:

i. Statutory branch audit of PSBs may be carried out for all branches with advances of `
20 crore & above and 1/5th of the remaining branches covering a representative cross
section of rural/semi-urban/urban and metropolitan branches, predominantly including
branches which are not subjected to concurrent audit, so as to cover 90% of advances
of a bank. CPUs/LPUs/and other centralized hubs by whatever nomenclature called
would be included in the one fifth of the remaining branches every year.

ii. In respect of branches below the cut-off point, which are subject to concurrent audit by
chartered accountants, henceforth, LFARs and other certifications done earlier by
SBAs will now be submitted by the concurrent auditors to the Chairman of the bank
and such branches may not generally be subject to statutory audit. The banks in turn
will consolidate/compile all such LFARs and other certifications submitted by the
Concurrent Auditors and submit to Statutory Central Auditor as an internal document
of the bank.
iii. Going forward, in mutual discussions with GoI and SCAs, based, inter alia, on the
operational efficiency and robustness of CBS, system driven identification of NPAs,
and integrity of MIS, managements of individual PSBs may decide on the threshold
level of advances for the purpose of selecting branches for statutory audit.

iv. Progressively, the threshold level of advances may be increased so that the number of
branches to be taken up for statutory audit is phased down over a period of time.

a. The list of eligible auditors/audit firms will be prepared by the Institute of Chartered
Accountants of India (ICAI) as per the norms prescribed by RBI.

87
 b. The above list will be subjected to scrutiny by RBI for identifying the continuing and
rested firms and excluding audit firms against whom adverse remarks/disciplinary
proceedings are pending or who have been denied audit.
c. RBI will, thereafter, forward the final list of all eligible auditors/audit firms to PSBs for
selection.
d. The PSBs will select the required number of branch auditors/audit firms. Banks will be
required to clearly advise the audit firms selected for consideration of appointment that
each audit firm can take up audit assignment (branch audit) in one PSB only. The audit
firm should give their consent in writing for consideration of appointment in the bank
concerned for the particular year and the subsequent continuing years.
e. The consent given by an audit firm will be treated as irrevocable and request, if any,
from audit firms for changing the bank, after giving its consent to the bank concerned
will not be entertained.
f. After the selection of branch auditors, PSBs will be required to recommend the names
of both continuing and selected branch auditors to RBI for seeking its prior approval
before their actual appointment, as per statutory requirement.

2. The following procedure will be followed for appointment of Statutory Branch Auditors
(SBAs) in Public Sector Banks (PSBs):

3. SBAs will have a maximum tenure of four years. The appointment of SBAs will be made
on an annual basis, subject to their fulfilling the eligibility norms prescribed by RBI from time
to time and also subject to their suitability.

4. The number of eligible auditors / audit firms is more than the number of branches to be
audited at the following 33 centres (viz. Mumbai, Kolhapur, Pune, Solapur, Thane, Kolkata,
Chennai, Coimbatore, Delhi/ New Delhi, Ajmer, Bikaner, Jaipur, Kota, Udaipur, Ahmedabad,
Vadodara, Surat, Hyderabad, Chandigarh, Raipur,

Faridabad, Gurgaon, Panchkula, Panipat, Sonipat, Bangalore, Ernakulam, Indore, Nagpur,

Ludhiana, Jodhpur, Bhilwara, and Ghaziabad). In such centres, the auditors/ audit firms will
be put to a period of compulsory rest for two years after completion of four years of continuous
branch audit. In other centres, where the number of eligible auditors / audit firms is less than
the number of branches to be audited, the branch auditors on completion of four years of
continuous branch audit will be subjected to the policy of rotation.

5. While allotting branches, banks are required to select auditors/audit firms which are in close
proximity to their offices/branches. Banks are also required to have a suitable mix of various
categories of auditors / audit firms while selecting the branch auditors keeping in view the size
of the branches to be audited.

6. As regards statutory branch audit to be carried out by SCAs, banks will allot the top 20
branches(to be selected strictly in order of the level of outstanding advances) in such a manner
as to cover a minimum of 15% of total gross advances of the bank by SCAs.

C. General Guidelines applicable to SBAs

88
(i) All PSBs are required to have a Board approved policy for appointment of statutory auditors
and the same may be hosted on the bank’s web-site. Banks are also required to ensure that the
policy framed by the Board in the matter of selection of auditors/audit firms for appointment
of auditors is strictly adhered to. Further, the list of firms selected for appointment as statutory
branch auditors may be placed before the ACB/Board of bank before for its concurrence before
it is forwarded to RBI for final approval.

(ii) The policy of one audit firm for one PSB will be continued. Accordingly an audit firm will
be eligible to be appointed as a central/branch auditor of only one PSB during a particular year.

(iii) In order to protect the independence of the auditors/audit firms, banks will have to make
the appointments of branch auditors for a continuous period of four years subject to the firms
satisfying the eligibility norms each year. Banks cannot remove the audit firms during the
above period without the prior approval of the Reserve Bank of India.

(iv) The firms whose partner/s are on the Boards of PSBs are not to be appointed as auditors
of the same PSB.

5.2 INTERNAL AUDIT

 An internal audit offers risk management and evaluates the effectiveness of a
company’s internal controls, corporate governance, and accounting processes.
 The Sarbanes-Oxley Act of 2002 introduced new internal control requirements and
holds management legally responsible for their financial statements by requiring
senior corporate officers to certify in writing that the financials are accurately
presented.
 Internal audits provide management and board of directors with a value-added service
where flaws in a process may be caught and corrected prior to external audits.

Internal Audit Process

Internal Auditors generally identify a department, gather an understanding of the current
internal control process, conduct fieldwork testing, follow up with department staff about
identified issues, prepare an official audit report, review the audit report with management,
and follow up with management and the board of directors as needed to ensure
recommendations have been implemented.

Assessment Techniques

89
Assessment techniques ensure an internal auditor gathers a full understanding of the internal
control procedures and whether employees are complying with internal control directives. To
avoid disrupting the daily workflow, auditors begin with indirect assessment techniques, such
as reviewing flowcharts, manuals, departmental control policies or other existing
documentation. If documented procedures are not being followed, direct discussion with
department staff may be necessary.

Analysis Techniques

Auditing fieldwork procedures can include transaction matching, physical inventory

count, audit trail calculations, and account reconciliation as is required by law. Analysis
techniques may test random data or target specific data, if an auditor believes an internal
control process needs to be improved.

Reporting Procedures

Internal audit reporting includes a formal report and may include a preliminary or memo-
style interim report. An interim report typically includes sensitive or significant results the
auditor thinks the board of directors needs to know right away. The final report includes a
summary of the procedures and techniques used for completing the audit, a description of
audit findings, and suggestions for improvements to internal controls and control procedures.
The formal report is reviewed with management and recommendations for improvement are
discussed. Follow up after a period of time is necessary to ensure the new
recommendations have been implemented and have improved operating efficiency.

LONG FORM AUDIT REPORT (LFAR) AS PRESCRIBED BY RBI.

 LFAR is a separate Audit Report to be submitted to the Management the prescribed format.
 LFAR format first prescribed by RBI in 1985 and then latest revised in 2003.
 Generally, the specimen format provided by the Bank.
 In LFAR, the main focus is on identification of the lacunae in the operations and internal control
system of the Bank. Statutory Audit Report may not communicate this aspect.
 Statutory Audit Report and LFAR are two independent and different Audit Reports and cross-
referencing for any comments or qualifications should not be done.

IMPORTANT FEATURES OF LFAR:

90
  RBI has prescribed two formats of LFAR viz. LFAR for the Bank as a whole and LFAR
for the Branches of the Bank.
 Format of LFAR is in a Questionnaire Form. These Questions should be answered
clearly. Questions are only indicative and not exhaustive. Auditor should not limit the
report to only answering the questions, he may provide additional information relevant
to the Question.
 LFAR is not a substitute of Statutory Audit Report nor it is deemed to be a part of the
Main Audit Report.
 Any Adverse Comment in the LFAR may not necessarily result into a Qualification for
the Main Audit Report.

CHAPTER 6

6.1 CONCLUSION

The NPAs have always been a big worry for the banks in India. It is just not a problem for
banks but a curse for the economy too. The money locked up in NPAs is not available for
productive use and adversely affect on banks' profitability. The extent of NPA is comparatively
higher in public sectors banks. To improve the efficiency and profitability, the NPAs have to
be scheduled. Various steps have been taken by government to reduce the NPAs. This has led
to decline in the level of NPAs of the Indian banking sector. But a lot more needs to be done.
The NPAs level of our banks is still high as compared to the international standards. It is highly
impossible to have zero percentage NPAs. But at least Indian banks can try in competing with
foreign banks to maintain international standard. One cannot ignore the fact that a part of the
reduction in NPAs is due to the writing off bad loans by the banks. The Indian banks should
take care to ensure that they give loans to creditworthy customers as prevention is always better
than cure.

91
NPAs reflect the overall performance of the banks. A high level of NPAs suggests high
probability of a large number of credit defaults that affect the profitability and net-worth of
banks and also erodes the value of the asset. The NPA growth involves the necessity of
provisions, which reduces the overall profits and shareholders’ value. Due diligence and utmost
care must be taken by the branch managers before sanctioning the loans to the clients and
specially in case of lending to priority sector. So, careful steps like selection of right borrowers,
viable economic activity, adequate finance and timely disbursement, correct end use of funds
and timely recovery of loans are absolutely necessary pre conditions for preventing or
minimizing the incidence of new NPAs which will enhance the creditability of the banks and
in turn make the foundation of our country strong. Efficient management of loan assets is need
of the hour in the present day context.

6.2 OBSERVATION

 During my research going through shift of loan. it has been observed that had the the
terms of conditions of conducts being compliance, advanced level the account would
not have been turned to bad / NPA.

 We have observed that market scenario of different industries not been properly tracked
by the bankers this also lead to diversion of funds by the borrower

 Branches are not being meticulously following for assessing the expenses occurred
towards electricity in case of industry where electricity consumption is or higher side
other wise the account would not had been sleep all at once and necessary control
measures the bank would have been taken at appropriate time.

92
 6.3 SUMMARY OF FINDINGS

 The bank does not borrow money from NBFC or FI to give loan.
 Any one having valid documents can apply for loan.
 The bank sanction working capital limit based on, liquidity ration, activity ration,
profitability, ration and other analysis of Balance Sheet/P&L statement.
 It can be seen that the income from interest has constituted a major portion of the total
income there for it shows that the Punjab National Bank is performing well.
 The lead-time between the application and sanctioning of loan varies from 1 to 3 weeks,
depending upon the Quantum of loan.
 The percentage of income bank on its working capital varies with rate of interest and
that is linked with MCLR.
 The profit made by the banks shown a decreasing Trend.
 In case of a new unit Punjab National Bank looks into the technical feasibility as well
as economic viability of the project,which are called as TEV study.
 The Punjab National Bank asks for 3 years audited balance sheet, profit and loss
account, GST Return, income tax assessment, and wealth tax assessment for their
evaluation.
 The net profit of the bank has decreased from 2016-17 to 2017-18, due to high label
of NPA provisioning.
 There should be reduction in the interest rate on the deposit and increase in fund based
and non-fund based business and maximum utilisation of liquid fund.
 The customer base of the Punjab National Bank is gradually increasing.
 Punjab National Bank should adopt effective management of funds available.
 Banks should take step to curtail wasteful expenditure.

6.4 SUGGESTIONS

Suggestions for reducing Non Performing Assets

93
 Proper selection of viable economic activity.
 Regular post sanction follow up.
 Publishing the name of defaulter in local newspaper.
 Set up a group of Auctioneer's.
 Constant touch with persons trading(sundry debtors) with the borrower.
 Interest discount for prompt repayment.
 The banks should adopt the procedure of obtaining details of loans from other banks
before sanctioning credit, Punjab National Bank should insist on a clearance
certificate stating that no loan is overdue to any bank or any institution.
 There is an increasing deposit in Punjab National Bank must take necessary steps to
increase the percentage of profit by increasing lending to corporate and big clients.
 Incidence of defaulting borrowers comes to around ten percent of total loans efforts
should be made to organise an effective credit collection department.
 Punjab National Bank must increase the percentage of loan amount on the fixed
deposits/Demand loan/overdraft against RD.
 Punjab National Bank should develop awareness among the corporate organisation
about the various schemes of loans provided by them through a proper
management strategy.
 Punjab National Bank to take initiative to achieve their future plans.

94
 6.5 BIBLIOGRAPHY

http://www.capitalmarket.com/Company-Information/Information/About-Company/Punjab-National-
Bank/7855
(Reference- https://www.pnbindia.in)
https://www.pnbindia.in/BoardofDirectors.aspx
https://www.pnbnet.in/RenderKRFiles.ashx?id=22
https://economictimes.indiatimes.com/wealth/borrow/banks-can-check-3-year-history-of-
borrowers/articleshow/58940541.cms
https://www.mbaskool.com/business-concepts/finance-accounting-economics-terms/6941-maximum-
permissible-banking-finance.html
http://technoeconomicvailblity.com
https://www.investopedia.com/terms/t/termloan.asp
https://www.creditmantri.com/article-what-is-cash-credit-loan/
https://www.paisabazaar.com/business-loan/overdraft-account/
http://www.financialdictionary.net/define/Demand+Loan/
https://www.investopedia.com/terms/b/bankguarantee.asp
https://iedunote.com/security-of-credit
https://www.bankexamstoday.com/2017/01/primary-security-vs-collateral-security.html
https://www.wallstreetmojo.com/non-performing-assets-npa/
http://www.allbankingsolutions.com/Articles/Deficiency-Lapses-PMMY-MUDRA.html
https://www.linkedin.com/pulse/fraud-lack-due-diligence-behind-indias-banking-npa-crisis-ahmar
https://moneyview.in/blog/2018/06/what-restructuring-bank-loans/
https://www.investopedia.com/terms/s/statutory-audit.asp
https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=946

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