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Loans and Advances

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Title: PowerPoint Presentation Author: mailuser Last modified by: IDBI BANK Created Date: 5/26/2009 11:46:24 AM Document presentation format: On-screen Show (4:3) – PowerPoint PPT presentation

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Title: Loans and Advances


1
Loans and Advances Statutory and Regulatory
Restrictions
  • CA Rakesh Awasthi
  • M Com, ACA, ACS, CISA (USA),CAIIB
  • General Manager
  • Corporate Banking Group
  • IDBI Bank Ltd.

2
IDBI Bank Limited A Premier Banking Institution
  • IDBI is a Public Sector Bank (classified as
    Other Public Sector Bank)
  • with GOI holding of 76.50
  • Apex DFI (Development Financial Institution) in
    the country played a key role in the industrial
    growth of the country
  • Converted into a Banking Company in October 2004
  • Total assets base of Rs 3,28,997 Crs as on
    31.03.2014 (Total Business Rs.430502 Crore, TCF
    Rs. 35152 Cr., TCE Rs. 4,48,964 Crore)
  • Profit After Tax Rs 1,121 Crs for year ended
    31.03.2014
  • Capital Adequacy Ratio of 12.23 (as per Basel
    III) as on 31.12.2014
  • Network of 1777 branches, 1242 Centers and 2999
    ATMs across the country
  • Diversified activities through group companies-
    IDBI Capital Market Services Ltd, IDBI Intech
    Ltd, IDBI Asset Management Ltd, IDBI Trusteeship
    Services Ltd IDBI Federal Life Insurance Co
    Ltd.

3
Statutory Restrictions
Advances against banks own shares
In terms of Section 20(1) of the Banking
Regulation Act, 1949, Bank cannot grant any loans
and advances on the security of its own shares.

3
4
Advances to Banks Directors
  • As per section 20(1) of the Banking Regulation
    Act, 1949 also lays down the restrictions on
    loans and advances to the directors and the firms
    in which they hold substantial interest.
  • Banks are prohibited from entering into any
    commitment for granting any loans or advances to
    or on behalf of (a) any of its directors, or (b)
    any firm in which any of its directors is
    interested as partner, manager, employees or
    guarantor, or (c) any company (not being a
    subsidiary of the banking company or a company
    registered under Section 25 of the Companies Act,
    1956, or a Government company) of which, (or the
    subsidiary or the holding company of which) any
    of the directors of the bank is a director,
    managing agent, manager, employee or guarantor
    or (d) in which he holds substantial interest, or
    (e) any individual in respect of whom any of its
    directors is a partner or guarantor.

4
5
Advances to Banks Directors
There are certain exemptions in this
regard. In terms of explanation to the Section
loan or advances shall not include any
transaction which the Reserve Bank may specify by
general or special order as not being a loan or
advance for the purpose of this Section. While
doing so the RBI shall, keep in view the nature
of the transaction, the period within which, and
the manner and circumstances in which , any
amount due on account of the transaction is
likely to be realised, the interest of the
depositors and other relevant consideration.
5
6
Loans and advances shall not include
  1. Loans or advances against Government securities,
    life insurance policies or fixed deposits
  2. Loans or advances to the Agricultural Finance
    Corporation Ltd
  3. Such loans or advances as can be made by a
    banking company to any of its directors (who
    immediately prior to becoming a director, was an
    employee of the banking company) in his capacity
    as an employee of that banking company and on the
    same terms and conditions as would have been
    applicable to him as an employee of that banking
    company, if he had not become a director of the
    banking company.

6
7
Loans and advances shall not include
  • Such loans or advances as are granted by the
    banking company to its WTD or Chairman and Chief
    Executive Officer, (who was not an employee of
    the banking company immediately prior to his
    appointment as Chairman/ Managing Director /CEO,)
    for the purpose of purchasing a car, personal
    computer, furniture or constructing/acquiring a
    house for his personal use and festival advance,
    with the prior approval of the RBI and on such
    terms and conditions as may be stipulated by it

7
8
Loans and advances shall not include the
following
  • Call loans made by banking companies to one
    another
  • Facilities like bills purchased/discounted
    (whether documentary or clean and sight or
    usance), purchase of cheques, other non-fund
    based facilities like acceptance/co-acceptance of
    bills, opening of L/Cs and issue of guarantees,
    purchase of debentures from third parties, etc.

8
9
Loans and advances shall not include
  • Line of credit / overdraft facility extended by
    settlement bankers to National Securities
    Clearing Corporation Ltd. (NSCCL) / Clearing
    Corporation of India Ltd. (CCIL) to facilitate
    smooth settlement and
  • A credit limit granted under credit card facility
    provided by a bank to its directors to the extent
    the credit limit so granted is determined by the
    bank by applying the same criteria as applied by
    it in the normal conduct of the credit card
    business.

9
10
Guarantee/LC, on behalf of Banks Directors
  • Purchase of or discount of bills from directors
    and their concerns, which is in the nature
    of clean accommodation, is reckoned as loans and
    advances for the purpose of Section 20 of the
    Banking Regulation Act, 1949.
  • Guarantees and opening of L/Cs on behalf of the
    banks directors, in the event of the principal
    debtor committing default in discharging his
    liability and the bank being called upon to
    honour its obligations under the guarantee or
    L/C, the relationship between the bank and the
    director could become one of the creditor and
    debtor.

11
Restrictions on Power to Remit Debts
  • Section 20A of the BR Act, 1949 stipulates that
    notwithstanding anything to the contrary in
    Section 293 of the Companies Act, 1956, a Bank
    shall not, except with the prior approval of the
    RBI, remit any debt due to it by
  • any of its directors, or
  • any firm/company in which any of its directors is
    interested as director/partner/managing agent/
    guarantor, or
  • any individual, if any of its directors is his
    partner/ guarantor
  • Any remission made in contravention of the
    provisions shall be void and have no effect.

12
Restrictions on Holding Shares in Companies
  • Section 19(2) of the Banking Regulation Act,
    1949 Bank should not hold shares in any company
    except as provided in sub-section (1) whether as
    pledgee, mortgagee or absolute owner, of an
    amount exceeding 30 percent of the paid-up share
    capital of that company or 30 percent of its own
    paid-up share capital and reserves, whichever is
    less.
  • Section 19(3) of the Banking Regulation Act,
    1949 The Banks should not hold shares whether as
    pledgee, mortgagee or absolute owner, in any
    company in the management of which any managing
    director or manager of the Bank is in any manner
    concerned or interested.

13
Restrictions on Credit to Companies for Buy-back
of their Securities
  • Section 77A(1) of the Companies Act, 1956
    Companies are permitted to purchase their own
    shares or other specified securities out of their
    free reserves, or securities premium account, or
    the proceeds of any shares or other specified
    securities, subject to compliance of various
    conditions specified in the Companies (Amendment)
    Act, 1999.
  • Banks should not provide loans to companies for
    buy-back of shares/securities.

14
Regulatory Restrictions
  • Granting loans/advances to relatives of Directors
  • Without prior approval of the Board or without
    the knowledge of the Board, no loans and advances
    should be granted to
  • relatives of the Banks chairman/Managing
    Director or other Directors
  • Directors (including Chairman/Managing Director)
    of other banks and their relatives,
  • Directors of Scheduled Co-operative Banks and
    their relatives,
  • Directors of Subsidiaries / Trustees of Mutual
    Funds/Venture Capital Funds set up by the
    financing banks or other banks.

14
15
Lending to directors and their relatives on
reciprocal basis
Justification There have been instances where
certain banks have developed an informal
understanding or mutual/reciprocal arrangement
among themselves for extending credit facilities
to each others directors, their relatives, etc.
By and large, they did not follow the usual
procedures and norms in sanctioning credit limits
to the borrowers, particularly those belonging to
certain groups or directors, their relatives,
etc. Facilities far in excess of the sanctioned
limits and concessions were allowed in the course
of operation of individual accounts of the
parties.
15
16
Limit for Lending to Directors of other Bank
  • Unless sanctioned by the Board of
    Directors/Management Committee, Banks should not
    grant loans and advances aggregating Rupees
    twenty five lakhs and above to
  • directors (including the Chairman/Managing
    Director) of other banks
  • any firm in which any of the directors of other
    Banks is interested as a partner or guarantor
    and
  • any company in which any of the directors of
    other banks holds substantial interest or is
    interested as a director or as a guarantor.

16
17
Lending to spouse / minor / dependent children of
Directors
  • The restrictions as contained in Section 20 of
    the Banking Regulation Act, 1949 would apply to
    grant of loans and advances to spouse and
    minor/dependent children of the Directors of
    Banks.
  • However, banks may grant loan or advance to or
    on behalf of spouses of their Directors in cases
    where the spouse has his/her own independent
    source of income arising out of his / her
    employment or profession and the facility so
    granted is based on standard procedures and norms
    for assessing the creditworthiness of the
    borrower.

17
18
Unless sanctioned by the Board/Management
Committee of the Board, Banks not to grant loans
and advances aggregating Rupees twenty five lakhs
and above to
  1. any relative (other than spouse and minor /
    dependent children of their own Chairmen/
    Managing Directors or other Directors
  2. any relative other than spouse and
    minor/dependent children of the Chairman
    /Managing Director or other directors of other
    banks
  3. any firm in which any of the relatives other than
    spouse and minor/ dependent children as mentioned
    in (a) (b) above is interested as a partner or
    guarantor and
  4. any company in which any of the relatives other
    than spouse and minor/dependent children as
    mentioned in (a) (b) above hold substantial
    interest or is interested as a director or as a
    guarantor.

18
19
Discloser of Interest
  • The proposals for credit facilities of an amount
    less than Rupees twenty five lakh to these
    borrowers may be sanctioned by the appropriate
    authority in the financing bank under powers
    vested in such authority, but the matter should
    be reported to the Board.
  • The Chairman/ Managing Director or other director
    who is directly or indirectly concerned or
    interested in any proposal should disclose the
    nature of his/her interest to the Board when any
    such proposal is discussed.
  • Interested directors should not be present in the
    meeting unless his/her presence is required by
    the other directors for the purpose of eliciting
    information and the director so required to be
    present shall not vote on any such proposal.
  • The above norms relating to grant of loans and
    advances will equally apply to awarding of
    contracts.

19
20
The scope of the term relative
  • Spouse
  • Father
  • Mother (including step-mother)
  • Son (including step-son)
  • Sons Wife
  • Daughter (including step-daughter)
  • Daughters Husband
  • Brother (including step-brother)
  • Brothers wife
  • Sister (including step-sister)
  • Sisters husband
  • Brother (including step-brother) of the spouse
  • Sister (including step-sister) of the spouse

20
21
The term loans and advances will not include
advances against
  • Government securities
  • Life insurance polices
  • Fixed or other deposits
  • Stocks and shares
  • Temporary overdrafts for small amounts, i.e. up
    to Rupees twenty five thousand.
  • Casual purchase of cheques up to Rupees five
    thousand at a time.
  • Housing loans, car advances, etc. granted to an
    employees of the bank under any scheme applicable
    generally to employees.

22
Substantial Interest
  • The term substantial interest shall have the
    same meaning as assigned to it in Section 5(ne)
    of the Banking Regulation Act,1949. (Shares of Rs
    5 Lakh or 10 of the paid up capital of the
    company whichever is less)
  • Banks should ascertain and indicate the interest
    of a director of a financing bank or of another
    bank, or his relatives, in credit proposals/award
    of contracts placed before the Board/Committee or
    other appropriate authority of the financing
    banks

23
Declaration by Borrowers
  • Every borrowers should furnish a declaration to
    the bank to the effect that-
  • (Where the borrows is an individual) he is not a
    director or specified near relation of a director
    of a banking company
  • (Where the borrower is a partnership firm) none
    of the partners is a director or specified near
    relation of a director of a banking company and
  • (Where the borrower is a joint stock company)
    none of its directors, is a director or specified
    near relation of a director of a banking company.
  • The declaration should also give details of the
    relationship of the borrower to the director of
    the bank.


24
Recall the loan on false declaration
  • In order to ensure compliance with the
    instructions, banks should forthwith recall the
    loan when it transpires that the borrower has
    given a false declaration.
  • The above guidelines should also be followed
    while granting loans/advances or awarding
    contracts to directors of scheduled co-operative
    banks or their relatives.
  • These guidelines should also be followed by banks
    when granting loans and advances and awarding of
    contracts to directors of subsidiaries/trustees
    of mutual funds/venture capital funds set up by
    them as also other banks.
  • These guidelines should be duly brought to the
    notice of all directors and also placed before
    the banks Board of Directors.

25
Restrictions on Loans Advances/award of
contracts to senior Officers/their Relatives of
Banks
  • The statutory restrictions/regulations should
    form part of the rules and conditions of service
    applicable to senior officers of banks.
  • While sanctioning credit facilities/awarding
    contracts to senior officers of the Bank and
    employees and their relatives.
  • No officer or any Committee comprising an officer
    as member shall, while exercising powers of
    sanction of any credit facility, sanction any
    credit facility/award contract to him or his/her
    relative if they have substantial interest in the
    borrower.
  • Such a facility shall ordinarily be sanctioned
    only by the next higher sanctioning authority.
  • Such Credit facilities sanctioned to senior
    officers of the financing bank should be reported
    to the Board.

26
Restrictions on Grant of Financial Assistance to
Industries Producing/Consuming Ozone Depleting
Substances (ODS)
Banks should not extend finance for
setting for up of new units consuming/producing
the above ODS. In terms of circular No.
FI/12/96-97 dated February 16,1996 issued by the
erstwhile Industrial Development Bank of India,
no financial assistance should be extended to
small/ medium scale units engaged in the
manufacture of the aerosol units using CFC and no
refinance would be extended to any project
assisted in this sector.
27
Restrictions on Advances against Sensitive
Commodities under Selective Credit Control (SCC)
Issue of Directives With a view to preventing
speculative holding of essential commodities with
the help of bank credit and the resultant rise in
their prices, in exercise of powers conferred by
Section 21 35A of the Banking Regulation Act,
1949, the Reserve Bank of India, being satisfied
that it is necessary and expedient in the public
interest to do so, issues, from time to time,
directives to all commercial banks, stipulating
specific restrictions on bank advances against
specified sensitive commodities. (Food grains,
Major oil seeds, sugar etc.)
28
Restriction on payment of commission to staff
members including officers
Sanction 10(1)(b)(ii) of Banking
Regulation Act,, 1949, stipulates that a banking
company shall not employ or continue the
employment of any person whose remuneration or
part of whose remuneration takes the form of
commission or a share in the profits of the
company.
29
Restrictions on offering incentives on any
banking products
Banks should not offer any banking
products, including online remittance schemes
etc., with prizes /lottery/free trips (in India
and/or abroad), etc. or any other incentives
having an element of chance, except inexpensive
gifts costing not more than Rupee two hundred
fifty, as such products involve non-transparency
in the pricing mechanism and therefore go against
the spirit of the guidelines,. Such products, if
offered, by banks would be considered as
violation of the extant guidelines and the banks
concerned would be liable for penal action.
30
Loans to individuals against Shares, Debentures
and Bonds
  • Advances to Individuals
  • Loans against the security of shares,
    debentures and bonds should not exceed the limit
    of Rupees ten lakhs per individual if the
    securities are held in physical form and Rupees
    twenty lakhs per individual if the securities are
    held in dematerialised form.
  • Margin
  • Banks should maintain a minimum margin of 50
    percent of the market value of equity
    shares/convertible debentures held in physical
    form. In the case of shares/convertible
    debentures held in dematerialised form, a minimum
    margin of 25 percent should be maintained.

31
Advances to Share and Stock Brokers / Commodity
Brokers
  1. Banks and their subsidiaries should not undertake
    financing of Badla transactions.
  2. Share and stock brokers / commodity brokers may
    be provided need based overdraft facilities /
    line of credit against shares and debentures held
    by them as stock- in-trade.
  3. The ceiling of Rupees ten lakhs/Rupee twenty
    lakhs for advances against shares/debentures to
    individuals will not be applicable in the case of
    share and stock brokers / commodity brokers and
    the advances would be need based.
  4. A uniform margin of 50 per cent shall be applied
    on all advances / financing of IPOs/ issue of
    guarantees on behalf of share and stockbrokers. A
    minimum cash margin of 25 per cent (within the
    margin of 50) shall be maintained in respect of
    guarantees issued by banks for capital market
    operations.

32
Advances to other borrowers against
shares/debentures/ bonds
  • Statutory limit on shareholding in companies
  • In terms of section 19(2) of the Banking
    Regulation Act, 1949, no banking company shall
    hold shares in any company, whether as pledgee,
    mortgagee or absolute owner, of an amount
    exceeding 30 percent of the paid-up share capital
    of that company or 30 percent of its own paid-up
    share capital and reserves.
  • This is an aggregate holding limit for each
    company. While granting any advance against
    shares, underwriting any issue of shares, or
    acquiring any shares on investment account or
    even in lieu of debt of any company, these
    statutory provisions should be strictly observed.

33
Bank loan for finance promoters contribution
The promoters contribution towards
the equity capital of a company should come from
their own resources and the bank should not
normally grant advances to take up shares of
other companies. However, banks are permitted to
extend loans to corporate against the security
of shares (as far as possible in dematerialised
form) held by them to meet the promoters
contribution to the equity of new companies in
anticipation of raising resources subject to the
overall ceiling prescribed in addition to the
general guidelines.
34
Such loan as Bank Investment overall ceiling
  • The margin and period of repayment of the loans
    may be determined by the banks.
  • Loans sanctioned to corporate against the
    security of shares (as far as possible, demat
    shares) for meeting promoters contribution to
    the equity of new companies in anticipation of
    raising resources, should be treated as a banks
    investments in shares
  • However, the ceiling of 40 percent of the banks
    net worth as on march 31 of the previous year
    prescribed for the banks total exposure
    including both fund based and non-fund based to
    capital market in all forms should be strictly
    followed.

35
General guidelines applicable to advances against
shares / debentures / bonds
  • Shares / debentures / bonds should be valued at
    prevailing market prices when they are lodged as
    security for advances.
  • No advance against partly paid shares shall be
    granted.
  • No loans to be granted to partnership /
    proprietorship concerns against the primary
    security of shares and debentures.

36
Advances against Fixed Deposit Receipts (FDRs)
Issued by Other Banks
The banks should desist from
sanctioning advances against FDRs, or other term
deposits of other banks.
37
Loans against Certificate of Deposits (CDs)
  • Banks cannot grant loans against CDs.
    Furthermore, they are also not permitted to
    buy-back their own CDs before maturity.
  • On a review it has been decided to relax these
    restrictions on lending and buy back, until
    further notice, only in respect of CDs held by
    mutual funds.
  • While granting such loans to the mutual funds,
    banks should keep in view the provisions of
    paragraph 44(2) of the SEBI (Mutual Funds)
    Regulations, 1996.
  • Further, such finance if extended to
    equity-oriented mutual funds, will form part of
    banks capital market exposure, as hitherto.

38
Finance for and Loans/Advances against Depository
Receipts (IDRs)
No bank should grant any loan/advance
for subscription to Indian Depository Receipts
(IDRs). Further, no bank should grant any loan /
advance against security/collateral of IDRs
issued in India
39
INFRASTRUCTURE SUB SECTORS
Category Infrastructure sub-sectors Infrastructure sub-sectors
Transport i Roads and bridges
Transport ii Ports
Transport iii Inland Waterways
Transport iv Airport
Transport v Railway Track, tunnels, viaducts, bridges
Transport vi Urban Public Transport (except rolling stock in case of urban road transport)
Energy i Electricity Generation
Energy ii Electricity Transmission
Energy iii Electricity Distribution
Energy iv Oil pipelines
Energy v Oil / Gas / Liquefied Natural Gas (LNG) Storage Facility
Energy vi Gas Pipelines
40
INFRASTRUCTURE SUB SECTORS
Category Infrastructure sub-sectors Infrastructure sub-sectors
Water Sanitation i Solid Waste Management
Water Sanitation ii Water supply pipelines
Water Sanitation iii Water treatment plants
Water Sanitation iv Sewage collection, treatment and disposal system
Water Sanitation v Irrigation (dams, Channels, embankments etc)
Water Sanitation vi Storm Water Drainage System
Water Sanitation vii Slurry Pipelines
Communication i Telecommunication (Fixed network)
Communication ii Telecommunication towers
Communication iii Telecommunication Telecom Services
41
INFRASTRUCTURE SUB SECTORS
Category Infrastructure sub-sectors Infrastructure sub-sectors
Social and Commercial Infrastructure i Education Institutions (Capital stock)
Social and Commercial Infrastructure ii Hospitals (Capital stock)
Social and Commercial Infrastructure iii Three-star or higher category classified hotels located outside cities with population of more than 1 million
Social and Commercial Infrastructure iv Common infrastructure for industrial parks, SEZ, tourism facilities and agriculture markets
Social and Commercial Infrastructure v Fertilizer (Capital investment)
Social and Commercial Infrastructure vi Post harvest storage infrastructure for agriculture and horticultural produce including cold storage
Social and Commercial Infrastructure vii Terminal markets
Social and Commercial Infrastructure viii Soil-testing laboratories
Social and Commercial Infrastructure ix Cold Chain
Social and Commercial Infrastructure x Hotels with project cost of more than Rs. 200 crores each in any place in India and of any star rating
Social and Commercial Infrastructure xi Convention Centres with project cost8 of more than Rs. 300 crore each
42
Criteria for Financing
  • The amount sanctioned should be within the
    overall ceiling of the prudential exposure norms
    prescribed by RBI for infrastructure financing.
  • Banks / FIs should have the requisite expertise
    for appraising technical reference to the risk
    analysis and sensitivity analysis.
  • In respect of projects undertaken by public
    sector units, term loans may be sanctioned only
    for corporate entities (i.e. public sector
    undertakings registered under Companies Act or a
    Corporation established under the relevant
    statute.)

43
Criteria for Financing
  • While public sector units may include Special
    Purpose Vehicles (SPVs) registered under the
    Companies Act set up for financing infrastructure
    projects.
  • However, It should be ensured by banks and
    financial institutions that these loans /
    investments are not used for financing the budget
    of the State Governments.
  • Banks may also lend to SPVs in the private
    sector, registered under the Companies Act for
    directly undertaking infrastructure projects
    which are financially viable and not for acting
    as mere financial intermediaries.
  • Banks may ensure that the bankruptcy or financial
    difficulties of the parent / sponsor should not
    affect the financial health of the SPV.

44
Types of Financing by Banks
  • In order to meet financial requirements of
    infrastructure projects, banks may extend credit
    facility by way of
  • Working capital finance,
  • Term loan,
  • Project loan,
  • Subscription to bonds and debentures / preference
    shares/ equity shares acquired as a part of the
    project finance package which is treated as
    deemed advance
  • and any other form of funded or non-funded
    facility like LCs, Bank Guarantees etc.

45
Types of Financing by Banks
  • Take-out Financing
  • Banks may enter into take-out financing
    arrangement with IDFC/ other financial
    institutions or avail of liquidity support from
    IDFC / other FIs.
  • Inter-institutional Guarantees
  • Banks are permitted to issue guarantees
    favouring other lending institutions in respect
    of infrastructure projects, provided the bank
    issuing the guarantee takes a funded share in the
    project at least to the extent of 5 per cent of
    the project cost and undertakes normal credit
    appraisal, monitoring and follow-up of the
    project.

46
Types of Financing by Banks
  • Financing Promoters equity
  • In terms of Circular No. DBOD. Dir. BC. 90/
    13.07.05/ 98 dated August 28, 1998, banks were
    advised that the promoters contribution towards
    the equity capital of a company should come from
    their own resources and the bank should not
    normally grant advances to take up shares of
    other companies.
  • In view of the importance attached to the
    infrastructure sector, it has been decided that,
    under certain circumstances, an exception may be
    made to this policy for financing the acquisition
    of the promoters shares in an existing company,
    which is engaged in implementing or operating an
    infrastructure project in India. The conditions,
    subject to which an exception may be made are as
    follows

47
Exceptions for financing promoters equity
  • The bank finance would be only for acquisition of
    shares of existing companies providing
    infrastructure facilities.
  • Further, Acquisition of such shares should be in
    respect of companies where the existing foreign
    promoters (and/ or domestic joint promoters)
    voluntarily propose to disinvest their majority
    shares in compliance with SEBI guidelines, where
    applicable.
  • The companies to which loans are extended should,
    inter alia, have a satisfactory net worth.
  • The Company financed and the promoters/ directors
    of such companies should not be a defaulter to
    banks/ FIs.

48
Exceptions for financing promoters equity
  • In Order to ensure that the borrower has a
    substantial stake in the infrastructure company,
    bank finance should be restricted to 50 of the
    finance required for acquiring the promoters
    stake in the company being acquired.
  • Banks should ensure maintenance of stipulated
    margins at all times.
  • The banks financing acquisition of equity shares
    by promoters should be within the regulatory
    ceiling of 40 per cent of their net worth as on
    March 31 of the previous year for the aggregate
    exposure of the banks to the capital markets in
    all forms (both fund based and non-fund based).

49
Appraisal Due diligence on the viability of the
project
  • In respect of financing of infrastructure
    projects undertaken by Government owned entities,
    banks/Financial Institutions should undertake due
    diligence on the viability of the projects.
  • Banks should ensure that the individual
    components of financing and returns on the
    project are well defined and assessed.
  • State Government guarantees may not be taken as a
    substitute for satisfactory credit appraisal and
    such appraisal requirements should not be diluted
    on the basis of any reported arrangement with the
    Reserve Bank of India or any bank for regular
    standing instructions / periodic payment
    instructions for servicing the loans/ bonds.

50
Appraisal of project contracts, project risk
and creditworthiness
  • Infrastructure projects are often financed
    through Special Purpose Vehicles. Financing of
    these projects would, therefore, call for special
    appraisal skills on the part of lending agencies.
  • Identification of various project risk,
    evaluation of risk mitigation through appraisal
    of project contracts and evaluation of
    creditworthiness of the contracting entities and
    their abilities to fulfill contractual
    obligations will be an integral part of the
    appraisal exercise.
  • In this connection, banks/FIs may consider
    constituting appropriate screening
    committees/special cells for appraisal of credit
    proposals and monitoring the progress/performance
    of the projects.

51
Appraisal under consortium or syndication
arrangements
  • Often, the size of the funding requirement would
    necessitate joint financing by banks/FIs may
    consider
  • constituting appropriate screening committees
  • special cells for appraisal of credit proposals
  • and monitoring the progress/ performance of the
    projects.
  • Often, the size of the funding requirement would
    necessitate joint financing by banks/FIs or
    financing by more than one bank under consortium
    or syndication arrangements.
  • In such cases, participating banks/ FIs may, for
    the purpose of their own assessment, refer to the
    appraisal report prepared by the lead bank/ FIs
    or have the project apprised jointly.

52
Loans and advances to Real Estate Sector
  • While appraising loan proposals involving real
    estate, banks should ensure that the borrowers
    have obtained prior permission from government /
    local governments/ other statutory authorities
    for the projects, wherever required.
  • In order that the loan approval process is not
    hampered on account of this, while the proposals
    could be sanctioned in normal course, the
    disbursements should be made only after the
    borrower has obtained requisite clearances from
    the government authorities.

53
Definition of Wilful Default
  1. Deliberate non-payment of the dues despite
    adequate cash flow and good net worth
  2. Siphoning off of funds to the determent of the
    defaulting unit
  3. Assets financed either not been purchased or sold
    and proceeds have been misutilised
  4. Misrepresentation / falsification of records
  5. Disposal / removal of securities without banks
    knowledge
  6. Fraudulent transactions by the borrower.

54
Events of Wilful Default
  • A wilful default would be deemed to have
    occurred if any of the following events is
    noted-
  • If it has the capacity to honour the said
    obligations.
  • If it has not utilised the finance from the
    lender for specific purposes for which finance
    was availed of but has diverted the funds for
    other purposes.
  • If it has siphoned off the funds so that the
    funds have not been utilised for the specific
    purpose for which finance was availed of, nor are
    the funds available with the unit in the form of
    other assets.
  • If it has also disposed off or removed the
    movable fixed assets or immovable property given
    by him or it for the purpose of securing a term
    loan without the knowledge of the bank/lender.

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Other ACTs of Wilful of Default
  • Utilisation of short-term working capital funds
    for long-term purposes not in conformity with the
    terms of sanction.
  • Deploying borrowed funds for purposes /
    activities or creation of assets other than those
    for which the loan was sanctioned
  • Transferring borrowed funds to the subsidiaries /
    Group companies or other corporates by whatever
    modalities
  • Routing of funds through any bank other than the
    lender bank or members of consortium without
    prior permission of the lender
  • Investment in other companies by way of acquiring
    equities / debt instruments without approval of
    lenders
  • Shortfall in deployment of funds vis-à-vis the
    amounts disbursed / drawn and the difference not
    being accounted for.

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Definition of Siphoning Off
  • Siphoning off of funds, should be construed to
    occur if any funds borrowed from banks / FIs are
    utilised for purposes un-related to the
    operations of the borrower, to the detriment of
    the financial health of the entity or of the
    lender.
  • The decision as to whether a particular instance
    amounts to siphoning off of funds would have to
    be a judgment of the lenders based on objective
    facts and circumstances of the case.

57
Penal Measures
  • In order to prevent the access to the capital
    markets by the wilful defaulters, a copy of the
    list of wilful defaulters (non-suit filed
    accounts) and list of wilful defaulters (suit
    filed accounts) are forwarded to SEBI by RBI and
    Credit Information Bureau (India) Ltd. (CIBIL)
    respectively.
  • The legal process, wherever warranted, against
    the borrowers / guarantors and foreclosure of
    recovery of dues should be initiated
    expeditiously.
  • The lenders may initiate criminal proceedings
    against wilful defaulters, wherever necessary.

58
RBI Instruction for Criminal Action by Banks / FIs
It is essential to recognize that there is scope
even under the existing legislations to initiate
criminal action against wilful defaulters
depending upon the facts and circumstances of the
case under the provision of Sections 403 and 415
of the Indian Penal Code (IPC) 1860. Banks / FIs
are, therefore, advised to seriously and promptly
consider initiating criminal action against
wilful defaulters or wrong certification by
borrowers, wherever considered necessary, based
on the facts and circumstances of each case under
the above provisions of IPC to comply with our
instructions and the recommendations of JPC.
59
Early warning signal-preventive measures
  • i) Financial warning signals
  • Persistent irregularity in the account
  • Default in repayment obligation
  • Devolvement of LC/Invocation of Guarantees
  • Deterioration in liquidity/working capital
    position
  • Substantial increase in long term debts in
    relation to equity
  • Declining sales/Operating losses/Net losses
  • Rise in sales and fall in profits
  • Abnormal increase in overheads vis-à-vis
    sales/Increase in bad debts
  • ii) Operational warning signals
  • Low activity level in plant
  • Non-payment of wages/power bills/statutory dues.
  • Loss of critical customers/Frequent labour
    problems.
  • Evidence of aged inventory/large level of
    inventory.
  • Disorderly diversification/frequent changes in
    plan


59
60
Early warning signalcontd
  • iii) Management related warning signals
  • Lack of cooperation from key personnel
  • Desire to take undue risks
  • Family disputes
  • Poor financial control
  • Misreporting of financial statements
  • Diversion of funds
  • iv) Banking related warning signals
  • Declining bank balances/declining operations in
    the account
  • Opening of account with other than consortium
    bank.
  • Return of outward bills/dishonored cheques
  • Sales transactions not routed through the account
  • Frequent delays in submitting stock statements,
    financial data

60
61
Early warning signals..Contd.
Early Warning Signals can be identified on
scrutiny of i) Operations in the account. ii)
Visit to the units / Inspection. iii) Audit
Reports / Credmin Reports. iv) Regular review of
Risk Rating. v) Scan industry reports / reviews.
vi) Quarterly financial performance review.
vii) Analysis of concurrent audit reports /
internal audit reports. viii) Regular tracking
of overdue ix) Credit Audit. x) Annual Reviews.
xi) Close interaction with Relationship Managers
/ Co-lenders. xii) Frequent Joint/Consortium
meetings. xiii) Feedback of Nominee Directors.
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Targets for PSL
Total Priority Sector Advances 40 of the
Adjusted Net Bank Credit (ANBC) of the Bank or
credit equivalent amount of off-balance sheet
exposure of the Bank, whichever is higher. ANBC
shall be considered as on March 31 of previous
year. Total Agricultural Advances within PSL
target 18 of the ANBC or credit equivalent
amount of off-balance sheet exposure of the Bank,
whichever is higher. Of this, indirect lending in
excess of 4.5 of ANBC or credit equivalent
amount of Off-Balance Sheet Exposure, whichever
is higher, will not be reckoned for computing
achievement under 18 target (Indirect Agri 4.5
and Direct Agri 13.5, of ANBC). Lending to Micro
Small Enterprises (MSE) sector Year-on-Year
growth of 20
62
63
Targets for PSLcontd
  • Micro Enterprises within MSE Sector
  • Advances to MSE sector will be reckoned in
    computing achievement under the overall PSL
    target of 40 percent of ANBC/ credit equivalent.
  • 40 of total advances to MSE sector would go to
    (a) micro enterprises (manufacturing) with
    investment in plant machinery up to Rs 10 lakh
    and (b) micro enterprises (service) with
    investment in equipment up to Rs 4 lakh
  • 20 of total advances to MSE sector would go to
    (a) micro enterprises (manufacturing) with
    investment in plant machinery above Rs 10 lakh
    and up to Rs 25 lakh, and (b) micro enterprises
    (service) with investment in equipment above Rs 4
    lakh and up to Rs 10 lakh.
  • 10 annual growth in the number of micro
    enterprise accounts

63
64
Targets for PSL.contd
  • Advances to Weaker Sections
  • 10 of ANBC or credit equivalent amount of Off-
    Balance Sheet Exposure, whichever is higher.
  • Lending to Minority Communities
  • 15 of Priority Sector Lending
  • Women Beneficiaries
  • 5 of Adjusted Net Bank Credit (ANBC) or credit
    equivalent amount of Off-Balance Sheet Exposure,
    whichever is higher.

64
65
Single Borrower Exposure
Sl No. Particular Ceiling
1 Exposure to an individual company / firm / any other form of separate legal entity. Up to 15 of the Banks TCF.
2 Exposure to an individual company / firm / any other form of separate legal entity (infrastructure lending). Additional 5 of Banks TCF (i.e. up to 20 of TCF) provided the additional credit exposure is on account of infrastructure lending.
3 Exposure to an Oil company, who have been issued Oil bonds (which do not have SLR status) by GOI. Up to 25 Banks TCF.
4 In addition to above, Banks Board may consider further increase in the exposure ceiling on single borrower by 5 of Banks TCF, on exceptional basis subject to the borrower consenting to the bank making appropriate disclosure in its Annual Reports. In addition to above, Banks Board may consider further increase in the exposure ceiling on single borrower by 5 of Banks TCF, on exceptional basis subject to the borrower consenting to the bank making appropriate disclosure in its Annual Reports.
66
Regulatory Limits (borrower-group)
Sl. No. Particular Ceiling
1 Exposure to a borrower group. Up to 40 of the Banks TCF.
2 Exposure to a borrower group. (Infrastructure lending). Additional 10 of Banks TCF (i.e. up to 50 of TCF), provided the additional credit exposure is for infrastructure lending.
3 In additional to above, Banks Board may consider further increase in the exposure ceiling on group borrower by 5 of TCF, on exceptional basis. In additional to above, Banks Board may consider further increase in the exposure ceiling on group borrower by 5 of TCF, on exceptional basis.
67
Industry Exposure
  • Industry exposure limit is fixed at 10 of
    Banks Total Customer Exposure (TCE) except for
    power industry, which has been fixed at 15 of
    TCE.
  • The exposure limit shall also include investments
    in the nature of credit substitutes i.e.
    investments in convertible or Non Convertible
    Debentures, preference shares and equity shares.
  • Such industry limit would not be applicable to
    exposure to sensitive sectors, which are subject
    to separate exposure limits, as mentioned in
    subsequent paragraphs.

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Exposure to Sensitive Sector
  • From the Banks business perspective, sensitive
    sectors would normally include those sectors
    which are subject to a high degree of asset price
    volatility.
  • Currently following are the sensitive sector
  • Real Estate Sector (including commercial real
    estate),
  • NBFC,
  • Gems Jeweler (Diamond),
  • Commodities Sector,
  • Capital Market etc,

69
Exposure norms - Real Estate Sector
70
Exposure Norms - Non-Banking Finance Companies
(NBFC)
Sl. No. Particulars Ceiling
Banks exposure to single NBFC Banks exposure to single NBFC Banks exposure to single NBFC
1 NBFC-General 10 of Banks TCF. Additional exposure of 5 of Banks TCF is permitted subject to the funds on-lent by the NBFC to the infrastructure sector.
2 NBFC-Asset Finance Company (AFC) and Infrastructure Finance Company (IFC) 15 of Banks TCF. Additional exposure of 5 of Banks TCF is permitted subject to the funds on-lent by the NBFC-AFC / IFC to the infrastructure sector.
3 NBFC-predominantly engaged in lending against collateral of gold jewellery (i.e. such loans comprising 50 per cent or more of their financial assets) 7.5 of Banks TCF. Additional exposure of 5 of Banks TCF is permitted subject to the funds on-lent by the NBFC to the infrastructure sector.
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Internal Ceiling for Non-NBFC-MFI and Gems and
Jwellary
MFI Banks aggregate exposure to Non-NBFC-MFI
sector shall not exceed 2 of Banks TCE. Lending
to this sector would be guided by regulatory
guidelines issued from time to time. Limit
allocated to this sector would be used to
facilitate higher credit flows to priority sector
lending. Gems and JewelryThe Bank would adhere
to an internal exposure limit of 1.5 of Bank's
TCE for its exposure to Gems Jewellery sector.
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Capital Market Sector
  • Statutory Limit on Shareholding in Companies
  • In terms of Section-19(2) of the
    Banking Regulation Act 1949, the Bank will not
    hold shares in any company (whether as pledgee,
    mortgagee or absolute owner) of an amount
    exceeding 30 of the paid-up share capital of
    that company or 30 of its own paid-up share
    capital and reserves, whichever is less, except
    as provided in sub-section (1) of Section-19 of
    the Act.

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Overall Ceiling - Capital Market Sector
  • Regulatory Ceiling
  • In line with RBI guidelines, the Bank will
    follow below- mentioned ceilings for capital
    market exposures

Sl. No. Particulars Ceiling
1 Overall Ceiling for Banks Total Capital Market (TCM) Exposure (including fund non-fund based exposure). 40 of the Banks TNW.
2 Banks direct exposure to capital market. Sub-ceiling of 20 of Banks TNW.
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