PRE-SANCTION CREDIT PROCESS

The pre-sanction credit process comprises three stages viz., appraisal & recommendation, assessment and sanction. An indicative list of functions under each stage of the pre-sanction credit process is given below:

I. Stage Appraisal & Recommendation Indicative List of Activities involved in Appraisal Function
a) Preliminary appraisal Acceptability of the promoters Financial status in broad terms and whether it is acceptable Scrutinise carefully the companys Memorandum and Articles of Association to (i) ensure that there are no clauses prejudicial to the Banks interests, (ii) ascertain whether any limitations have been placed on the Companys borrowing powers and operations and (iii) the scope of activity of the company. Applicants status vis--vis other units in the industry Banks lending policy and other relevant guidelines/RBI guidelines Prudential Exposure norms Industry Exposure restrictions

Group Exposure restrictions Industry related risk factors Credit risk rating Profile of the promoters/senior management personnel of the project List of defaulters Caution lists Compliance regarding transfer of borrower accounts from one bank to another, if applicable Government regulations/legislation impacting on the industry; e.g., ban on financing of industries producing/consuming Ozone depleting substances In addition to the above, if the proposal is for Project Finance/ Term loan the following should be examined; Whether project cost is prima facie acceptable Debt/equity gearing proposed and whether acceptable Promoters ability to access capital market for debt/equity support Whether critical aspects of project demand, cost of production, profitability, etc are prima facie in order.

If the proposal is acceptable in the preliminary examination / presanction survey, the following additional information/essential data for further processing of the proposal need to be obtained;
A brief on the managerial resources to ascertain whether these are compatible with the size and scope of proposed activity. Demand and supply projections based on the overall market prospects Current practices for the particular product/service especially relating to terms of credit sales, probability of bad debts etc. Estimates of sales, cost of production and profitability Projected Profit & Loss Account and Balance Sheet for the operating years during the currency of the Bank assistance. If the request includes Project Financing i) appraisal report from Financial Institutions in case appraisal has been done by them, ii) No Objection Certificate from term lenders if already financed by them and iii) report from Merchant bankers in case capital market is being accessed, whether necessary, should be obtained.

Additional information in respect of existing concerns Details of existing borrowing arrangements, if any, Credit information reports from the existing bankers on the applicant Company Financial statements and borrowing relationship of Associate firms/Group Companies b)Detailed Appraisal

After a pre-sanction inspection of the project site or the factory, detailed appraisal exercise should be taken up using the appropriate format. It should generally contain the following aspects:
Viability of the project should be examined to ascertain that the company would have the ability to service its loan and interest obligations out of cash accruals from the business. Acceptability of the projected levels. Estimated working capital gap with reference to acceptable build up of inventory/ receivables /other current assets

 Credit information reports from the existing bankers, if any, and financial statements and borrowing relationship of Associate firms/Group Companies. In case of Companies accepting deposits from public whether compliance in terms of Section 58 AA & 58AAA made to be verified. All the data/information should be checked / counter checked through inter-firm comparison and industry comparisons. Method of depreciation change, if any, made in the recent past and the reasons therefore. Revaluation of the fixed assets done and the status of the revaluation reserve, if any created. Dividend policy. If the proposal is for Project Finance Examine the commercial, economic and financial viability and other aspects outlined below: Management quality, competence, track record and companys stricture & systems.

 Industry profile & prospects and Statutory clearance from various Govt. Departments/agencies. Obtaining of Licenses / permits / approvals/NOCs/Collaboration agreements as applicable Pollution Control Clearance. Cost of Project and source of finance. Arrangements proposed for raising debt and equity. Feasibility of the projections/estimates of sales cost of production and profits covering the period of repayment. Cash flows and fund flows Break Even Point in terms of sales, cost of production and profits covering the period of repayment. Whether profitability is adequate to meet stipulated repayments with reference to DSCR, ROI. Feasibility of arrangements to access capital market. Applicants strength on inter-firm comparisons.

c) Compile existing customers profile

Existing customers profile covering aspects relating to conduct of the account viz. conduct of the account, utilisation of limits, irregularities in the account, track record in meeting repayment obligations, Compliance with other terms & conditions and requirements regarding submission of stock statements, FFRs, renewal data etc, Value of the account with break-up of income earned, routing of transactions/forex business through account, concessions extended and value thereof, action taken on serious irregularities/Warning signals/comments/observations made in various audit reports. d) Credit Risk Rating Credit risk assessment is to be made for Working Capital/Term loan as per extant guidelines. e) Opinion Reports Compile opinion reports on the company

f)

Existing charges on assets of the unit

If the borrowing entity is a company, obtain Search Report from ROC for verification of charges.

g) Structure of facilities and Terms of sanction Terms and Conditions for exposures proposed both facility wise and overall limits need to be fixed. h) Review of the proposal Review of the proposal should be done covering (i) Strengths and weaknesses of the exposure proposed, (ii) risk factors and steps proposed to mitigate them and (iii) deviations proposed from usual norms of the Bank and the reasons therefore. i) Recommendations for sanction Prepare a draft proposal in the prescribed format with required

backup details and recommendation for sanction. The proposals will be presented in a concise form in the specified format (Format S) containing the discussion relevant to the sanction of Working Capital / Term Loan commitment. Besides this, branches will also prepare jottings / notes on select portions of analysis / assessment as BACK UP DETAILS for the final presentation in the format. These back-up details [annexure/II (i)], specific to each credit proposal, will form a part of the record at the branch which may be required for examination by the functionaries carrying out the appraisal, assessment including the functionaries at Zonal Office/LHO and for verification by Inspecting Officials/Credit Auditors.
j) Assistance to Assessor

Interact with assessor, provide additional inputs arising from the assessment, incorporate these and required modifications in the draft proposal and generate an integrated final proposal for sanction.

II. STAGE ASSESSMENT Indicative List of Activities involved in Assessment Function:

Review the draft proposal together with the back-up details/notes, and the borrowers application, financial statements and other reports/documents examined by the appraiser. Interact with the borrower and the appraiser. Carry out pre-sanction visit to the applicant company and their project/factory site. Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow Statement/ Working Capital Assessment/ Project cost & sources/Break Even analysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order. Examine critically the following aspects of the proposed exposure; Banks lending policy and other guidelines issued by the Bank from time to time

RBI Guidelines Background of promoters/ Senior Management Inter-firm comparison Technology in use in the company Market conditions Projected performance of the borrower vis--vis estimates and performance Viability of the project Strengths and Weaknesses of the borrower entity. Proposed structure of facilities Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment schedule. Adequacy of proposed security cover Credit risk rating Pricing and other charges and concessions, if any, proposed for the facilities Risk factors of the proposal and steps proposed to mitigate the risk

 Deviations proposed from the norms of the Bank and justifications therefore. Whether the inputs/comments are adequate or require modification? Arrange for additional inputs/ modifications to be incorporated in the proposal, if any, with required modification to the initial recommendation, by the Appraiser. Recapitulate briefly the conclusions of the appraisal and state whether the proposal is economically viable. Recount briefly the value of the companys (and the Groups) connections. State whether, all considered, the proposal is a fair banking risk. Finally, give recommendations for grant of the requisite fund-based and non-fund based credit facilities.
III. STAGE SANCTION Indicative List of Activities involved in the Sanction Function Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive manner as required. If any critical information is not provided in the proposal, remit it back to the

Assessor for supply of the required data/clarifications. Examine critically the following aspects of the proposed exposure in the light of the relevant/extant instructions in force: Banks lending policy and other relevant guidelines RBI guidelines Borrowers status in the industry Industry prospects Experience of the Bank with other units in similar industry Overall strength(s) of the borrower Projected level of operations Risk factors critical to the exposure and adequacy of the safeguards proposed there against Value of the existing connection with the borrower Credit risk rating Security, pricing, charges and concessions proposed for the exposure and covenants stipulated vis--vis the risk perception.

Other important aspects of pre-sanction credit process The broad policy on credit facilities to companies whose directors are appearing in the Willful defaulters/defaulters list of RBI is outlined in the Annexure/II(ii). As a measure of effective follow-up, the Bank stipulates a number of compulsory covenants and optional covenants in respect of all advances. It should be ensured that all important terms & conditions / covenants are incorporated in the sanction letter / relevant security documents. Time norms and other guidelines for monitoring disposal of credit proposals 30 to 60 days