ROLE GU I DE C U M C E RTI FI CATION MA N UAL

CP ADVANCE CREDIT – 2022

 ( For interna l Circulation Only)

FOREWORD

Dear Role Hold er,

Banking Industry is witnessing changes at an unprecedented pace. It has, therefore become

imperative that we continuously update and upgrade our skills relating to our profession. Each one
of us shou ld no t on ly und erst an d h is/h er ro le and responsibilities but also continuously equip
oneself with latest guidelines in related areas. This will improve professional effective n e ss and
also lead to enhanced customer r satisfaction.

With these objectives in mind, Bank has introduced role-based certification programs for
employees across all levels.

We, at STU, have made an effort in this direction by compiling a Role Guide cum Certification
Manual which will provide insight into the role you are currently performing. This booklet may be
referred to whenever you need clarity in your day to day working.

We are confident that this manual will provide you conceptual clarity and also help in mitigating
associated risks.

We wish you all the best for a successful and enriching journey in your current role.

With Best Wishes,

Chief General Manager (STU)
 INDEX

S.No. Chapter Page No.

1 LOAN POLICY MATTERS 4-50
2 A PRE SANCTION CREDIT PROCESS 51-90
TYPES OF BORROWERS 91-161
2 B
VALUATION OF ASSETS
TIR
SME DOCUMENTATION
CREATION OF EQUITABLE MORTGAGE
CERSAI
3 ANALYSIS OF FINANCIAL STATEMENTS 162-199
4 A OVERVIEW OF WORKING CAPITAL ASSESSMENT 200-224
B LETTER OF CREDIT 225-282
BANK GUARANTEE
C EXPORT FINANCE 283-305
IMPORT FINANCE
5 TERM LOAN AND PROJECT FINANCE 306-334
6 A CREDIT RISK ASSESSMENT 335-372
B PREPARATION OF PROPOSALS AND COMMON MISTAKES 373-384
OBSERVED IN PROPOSALS. CALCULATION OF RAROC
7 ASSET PRODUCTS 385-414
8 POST SANCTION PROCESS 415-462
9 A IRREGULARITY : IDENTIFICATION AND REPORTING 463-529
B SPECIAL MENTION ACCOUNTS
C RESTRUCTURING OF ADVANCES
D NPA POLICY, IRAC AND PROVISIONING NORMS
E EXIT POLICY FOR STANDARD ASSETS INCLUDING SMAs
10 A SALE OF PROPERTIES UNDER SARFAESI ACT 530-539
B RECOVERY OF BANK DUES THROUGH CIVIL COURTS 540-542
C RECOVERY OF BANK DUES THROUGH DRTs 543-552
D SETTLEMENT OF DUES THROUGH LOK ADALATS 553-555
E COMPROMISE SETTLEMENT POLICY 556-567
F INSOLVENCY AND BANKRUPTCY CODE 2016 568-577
G WILLFUL DEFAULT 578-585
H NON-COOPERATIVE BORROWER 586-587
I TRANSFER OF STRESSED LOAN EXPOSURES 588-605
 BACK TO INDEX
CHAPTER-1
Loan Policy
LEARNING OBJECTIVES
1) To know and understand the organisation of business
2) To understand about the exposure norms and credit risk concentration.
3) The various types of due diligence is required while dealing loans and advances
4) To understand the take over norms
5) To know about the performance/financial analysis, Credit risk assessment, assessment of credit
facilities and pricing while dealing loans and advances.
6) Delegation of financial powers.
7) Various types of security associated with the loans and advances.
8) Follow up, Supervision and maintenance of advances
9) IRAC norms and policy on defaulters/wilful defaulters

PREAMBLE

The Loan policy, at a holistic level, is an embodiment of the Bank's approach to sanctioning of loans, managing
and monitoring credit risk, and aims at making the systems and controls effective. It is guided by the highest
standards of commercial prudence and ethical business practices. While formulating the loan policy, the overall
risk appetite of the Bank has been taken into consideration.

The loan policy provides a broad framework for management of the loan portfolio of the Bank with emphasis on
creating products and services as well as maintaining asset quality. It helps our customers in achieving their goals
and fulfilling the Bank’s vision ‘Be the Bank of Choice for A Transforming India’.

The provisions of the loan policy are applicable to the domestic as well as international operations of the Bank.
Based on the Bank’s loan policy, the Foreign Offices (FOs) have their own loan policies taking into account the
regulations and lending practices of the host country. Additionally, country-specific loan policy and manual of
instructions have been documented in all the FOs. Different procedural aspects relevant to their credit
portfolio/environment are incorporated in the Loan Policy of respective Foreign Offices. The provisions of Bank
Loan Policy, particularly in regard to prudential exposure norms / Large Exposure Framework, income
recognition and asset classification, industry concentration norms as well as external commercial borrowings of
Indian corporate clients will also apply to policies of Foreign Offices. It is the policy of the Bank that as far as
regulatory guidelines of the home and host country are concerned, the more stringent of the two will be applicable
except those countries where regulatory norms stipulate applicability of only local regulatory norms.

ORGANISATION OF BUSINESS

The Bank recognizes the need for a differentiated approach to marketing, risk management and service delivery
to different categories of borrowers. Taking this into account, different business verticals have been created, and
rules framed in regard to the type of the business that they will normally handle.

Retail & Digital Banking Group (R&DBG)

Commercial Clients Group (CCG)

Corporate Accounts Group (CAG)

Group Accounts
Group accounts should preferably be housed in one branch or, at the most, within the vertical which has the highest
exposure on the group

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 International Banking Group (IBG)
 Stressed Assets Resolution Group (SARG)
 Project Finance & Structuring Strategic Business Unit (PF&S SBU)
 Retail Loans in Personal Segment (PBBU/REHBU)
 Financial Inclusion & Micro Market (FI&MM) vertical
 Agriculture Business Unit (ABU)
 Financial Inclusion & Micro Credit (FI&MM)
 NBFC Alliances
 Bank's role under Lead Bank Scheme

EXPOSURE NORMS AND CREDIT RISK CONCENTRATION

While prudential guidelines for avoiding concentration of risk serve as broad indicators, continuous evaluation
of other elements such as market conditions, government policies, legal framework, economic indicators, stock
market movements, etc., is made to assess transaction risk intrinsic to a single borrower, group of borrowers,
segment of industry as well as to sectoral exposures in order to formulate short term exposure restrictions where
considered necessary. The Loan Policy recognises the need for measures aimed at better risk management and
avoidance of concentration of credit risk at the whole-Bank level and at the FOs. To this end, limits have been
prescribed for Bank’s exposure to single borrower, borrower groups, specific industry/ sector etc. RBI has
recently released a framework on large exposure on single borrower and close related group of borrowers. It
recognizes that the off-balance sheet exposures should also be subject to normal credit appraisal and discipline.

Definition of Exposure
Exposure shall include credit exposure and investment exposure. The sanctioned limits or outstanding’s,
whichever are higher, shall be reckoned for determining the exposure to an entity. However, in the case of fully
drawn term loans, where there is no scope for re-drawal of any portion of the sanctioned limit, the outstanding
s h a l l b e reckoned d as the exposure.

Credit Exposure
i) All types of funded and non-funded credit limits,
ii) Credit Exposure on account of derivative products using credit conversion factor;
iii) Facilities extended by way of equipment leasing, hire purchase finance and factoring services.

Investment exposure
i) Investments in shares and debentures of companies ii) Investments in PSU bonds
iii) Investments in Commercial Papers and similar commitments.

The ceilings on single / group exposure limits would not be applicable to existing / additional credit facilities
(including funding of interest and irregularities) granted to stressed assets under resolution.

Definition of Single/ Groups of Connected Counterparties as per LEF

a. Single Counterparty: The exposures to a group of counterparties with specific relationships or dependencies
such that, were one of the counterparties to fail, all of the counterparties would very likely fail. A group of this sort,
referred to in this framework as a group of connected counterparties, must be treated as a single counterparty.

b. Group of Connected Counterparties (GCC): Two or more natural or legal persons shall be deemed to be
a group of connected counterparties if at least one of the following criteria is satisfied.

Control relationship: One of the counterparties, directly or indirectly, has control over the other(s) or the
counterparties are directly or indirectly controlled by a third party.

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While assessing the control relationship, the control relationship criteria is satisfied if one entity owns more
than 50% of the voting rights of the other entity. In addition, the other control criteria to assess
connectedness are as under:
i. Voting agreements (e.g., control of a majority rights pursuant to an agreement with other shareholders)
ii. Significant influence on the appointment or dismissal of an entity’s administrative, management or supervisory
body, such as the right to appoint or remove a majority of members in those bodies, or the fact that a majority of
members have been appointed solely as a result of the exercise of an individual entity’s voting rights
iii. Significant influence of senior management e.g., an entity has the power, pursuant to a contract or otherwise,
to exercise a controlling influence over the management or policies of another entity (e.g., through consent rights
over key decisions, to decide on the strategy or direct the activities of an entity, to decide on crucial transactions
such as transfer of profit or loss).
iv. The above criteria will also be assessed with respect to a common third party (such as holding company),
irrespective of whether the bank has an exposure to that entity or not.
v. Further, the criteria specified in the extant accounting standards shall also be considered for qualitative
guidance while determining control.
However, where control has been established based on any of the above criteria, the Bank may still demonstrate
to the RBI in exceptional cases, e.g., existence of control between counterparties due to specific circumstances and
corporate governance safeguards, that such control does not necessarily result in the entities concerned
constituting a group of connected counterparties.

II. Economic interdependence: If one of the counterparties were to experience financial problems, in particular
funding or repayment difficulties, the other (s) as a result, would also be likely to encounter funding or repayment
difficulties.
Identification of possible connected counterparties on the basis of economic interdependence shall be mandatory
in all cases where the sum of all exposures to one individual counterparty exceeds 5% of the eligible capital base
(i.e., Tier 1 Capital), and not in other cases.
Establishing connectedness based on economic interdependence is applicable from 1st April 2020.

In the case of a split in the group, if the split is formalized, the splinter groups will be regarded as separate
groups. In case any doubt about the bonafides of the split, a reference may be made to RBI for its final view
in the matter to preclude the possibility of a split being engineered in order to prevent coverage under the
Group Approach.

Regulatory Guidelines (on Exposures and Relaxations / Restrictions)

Exposure norms: The regulator has prescribed the following caps, which the Bank shall comply with at all times:
Large Exposure Framework.
Nature of borrower Cap on Exposure (Prudential Norms)
Single Counterparty 20% of Bank’s Tier I Capital *
Group of Connected Counterparties. 25% of Bank’s Tier I Capital $
Single NBFC 20% of Bank’s Tier I Capital
Group of Connected NBFCs 25% of Bank’s Tier I Capital
Note:
* In exceptional cases, exposure upto additional 5% of the Tier I capital may be permitted to single
counterparty with the approval of Chairman.
$ on account of COVID-19 pandemic, Bank exposure to group of connected counterparties has been
increased from 25% to 30% of Tier I capital (upto 30.06.2021).
Any breach of the above Large Exposure Limits shall be under exceptional conditions only and shall
be reported to RBI (DBS, CO) immediately and rapidly rectified.

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 Large Borrower
In order to align the exposure norms with the BCBS standards, RBI has issued guidelines on Large Exposure
Framework (LEF) to be implemented with effect from 01.04.2019. Large borrower is defined as the sum of all
exposure values of the bank to a counterparty or a group of connected counterparties is equal to or above
10% of the Bank’s Tier- I Capital (instead of total capital funds as hitherto). The aggregate exposure to all “large
borrowers” should not exceed 800 % of Bank’s Tier I Capital. CRMD will monitor exposure under Large Exposure
Framework and put up review to RMCB at quarterly intervals.

The exposure to Large Borrower shall be reported by CRMD to RBI, Department of Banking Supervision,
Central Office (DBS, CO) as per the RBI guidelines.

Under LEF framework, an exposure to a counterparty will constitute both on balance sheet (accounting value of
exposure) and Off-Balance Sheet (by applying CCF with a floor of 10%) exposure included in either the banking
or trading book and instruments with counterparty credit risks. The LEF norms are applicable from
01.04.2019.

Non-Centrally cleared derivatives exposures shall be applicable from 1st October 2021.

The exposures that are exempted from the LEF are listed below:
1) Exposures to GOI and State Governments which are eligible for zero percent Risk weight under Basel
III – Capital regulation
2) Exposure to RBI
3) Exposures where the principal and interest are fully guaranteed by the Government of India;
4) Exposure secured by financial Instruments issued by GOI, to the extent that the eligibility criteria for
recognition of credit risk mitigation are met.
5) Intra-day interbank exposures
6) Intra-group exposure as it will continue to be governed by the Master Circular on Exposure Norms
7) Borrowers, to whom limits are authorised for Food Credit
8) Bank’s clearing related exposure to Qualifying Central Counter Parties (QCCPs)
9) Deposits maintained with NABARD on account of shortfall in achievement of targets for priority sector
lending.
10) Exposures to foreign sovereigns or their central banks that are:
a. subject to a 0% risk weight as per Basel III Capital regulations and,
b. denominated in the domestic currency of that sovereign and met out of resources of the same
currency.
RBI guidelines on LEF issued from time to time to be complied with.

Enhancing Credit Supply for Large Borrowers through Market Mechanism:

1.The Bank has to keep future incremental exposure to large “specified borrowers” within a “Normally
Permitted Lending Limit) (NPLL).
2. Specified Borrower: Means a borrower having Aggregate Sanctioned Credit Limit (ASCL) of more than:
a. Rs. 25,000 Cr at any time during FY 2017-18
b. Rs. 15,000 Cr at any time during FY 2018-19
c. Rs. 10,000 Cr at any time from April 1, 2019 onwards
The date on which the borrower becomes a specified borrower is termed as reference date.

3. Aggregate Sanctioned Credit Limit (ASCL): Means the aggregate of Fund based credit limits sanctioned or
outstanding, whichever is higher, to a borrower by the Banking System. ASCL also include:

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a. Unlisted privately placed debt with the banking system
b. ECB, Trade Credit raised from overseas branches of Indian Banks
Banking System means all banks in India including RRBs and Co-operative Banks and branches of Indian Banks
abroad.
4. Provisioning implications for the Bank (Incremental provisions and risk weights):
Incremental exposure of the Banking system to a s p e c i f i e d borrower beyond NPLL wou ld be deemed to
carry higher risk, which would be recognised by way of additional provisioning and higher risk weights as
under:
a. Additional provision of 3 percentage points on the incremental exposure of the banking system in excess
of NPLL, which would be distributed in proportion to each bank’s funded exposure.
b. Additional risk weight of 75 percentage points for the incremental exposure to the specified borrower. The
resultant additional risk-weighted exposure, in terms of risk-weighted assets, would be distributed in proportion
to each bank’s funded exposure to the specified borrower.
5. Exemptions:
a. Food Credit limits extended to State Governments/ Union Territories and Food Corporation of India
b. Exposure towards agencies setup by State Government/Union Territories which are engaged in the procurement
and distribution of food grains and other essential food commodities under the public distribution system.
Monitoring of the accounts shall be done by the BUs concerned. BUs shall provide the detailed report to
CRMD for consolidation and putting up review to RMCB at quarterly intervals.
Exposure on Single / Borrower Groups
Based on market conditions, government policies, legal framework, economic indicators, stock market
movements, and ease of doing business, an internal exposure limit has been set according to constitution of
borrowing unit. The details of current exposure levels prescribed are as under:

Constitution of Maximum ceiling on Exposure prescribed by Bank (Excluding facilities granted

Borrower against
specified securities)
Individuals as Maximum aggregate exposure of Rs. 100 cr or its equivalent.
borrowers
Non-corporates Maximum aggregate exposure of Rs. 250 cr or its equivalent
($) The above ceilings will also be applicable to the aggregate of all facilities sanctioned to
partnership firms which have identical partners.
Corporates (#) As per Large Exposure Framework prescribed by RBI (Refer 3.3.1).
Note: The exposure to Gems & Jewellery, Diamond Industry, Ship Breaking etc. shall be guided by the
Exposure Ceilings stipulated under the respective policies subject to Large Exposure Norms.
$ Non-corporates will include Partnerships, Trusts, HUFs, Associations and REIT (Real Estate Investment
Trust).
# Corporates will include Companies, Societies, Govt. Departments, Institutions and Statutory
Corporations, Infrastructure Investment Trust (Inv IT) and Limited Liability Partnerships (LLP).
Norms for the Bank Exposure- Internal

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 Maximum aggregate exposure is governed by Large Exposure Framework of RBI as well
as Enhancing credit supply for Large Borrowers through Market Mechanism.
With a view to diversifying exposure of the Bank, the following norms may be followed.
Counterparty Exposure limit set for the Bank
Single Counterparty a. Autonomous bodies promoted by Central Government/ Profit making
Central PSUs (Maharatna/Navratna/Miniratna)/ SPVs promoted by Profit
making Central PSUs (Maharatna/Navratna/Miniratna)/ State
Governments / PSUs guaranteed by Central Government/ State Government
institutions/ State PSUs guaranteed by State Governments (Irrespective of
CRA/ECR): - Maximum exposure as per LEF (i.e., presently 20% of Tier-I
Capital, exposure to be calculated with CCF). In exceptional cases, exposure upto
additional 5% of the Tier I capital may be permitted to single counterparty with
the approval of Chairman.
b. Others (without CCF):
(Rs. In Cr)

CRA Maximum Exposure

SB-1 &SB-2 12,000
SB-3 & SB-4 8,000
SB-5 & SB-6 4,800
SB-7 to SB -9 2,400
SB-10 & below 1,000
Group of connected a. Autonomous bodies promoted by Central Government/ Profit making
counterparties Central PSUs (Maharatna/Navratna/Miniratna)/ SPVs promoted by Profit
making Central PSUs (Maharatna/Navratna/Miniratna)/ PSUs guaranteed by
Central Government/ State Government istitutions/ State PSUs guaranteed by
State Governments (only for PQI<5): Max. exposure as per LEF (i.e.,
25% of Tier-I Capital, exposure to be calculated with CCF)
b. Other cases (without CCF based on PQI: (Rs. In Cr)

PQI % of Tier I Maximum Exposure

capital (without CCF)
PQI<=4 22 45,100
4< PQI<=7 19 39,000
7< PQI<=10 14 28,700
10< PQI<=13 6 12,300
13< PQI<=15 3 6,100

Other Guidelines:
1. The exposure shall be calculated based on Tier-I capital as on 31st March/ 30th September.
2. Bank may extend Sole Banking facility for exposures up to Rs. 500 Cr.
3. In cases, where sole banking exposure exceeds Rs. 500 Cr, endeavour should be made to bring the
exposure under consortium. In consortium, our bank share may be a minimum of 10% and participating
banks limited to 10.

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4. Exposures to SB-10 & below rated borrower shall be Maximum Rs. 1000 Cr (However, products under
schematic lending shall be guided as per the norms of the Scheme).
5. Normally, the above exposure norms should not to be exceeded. However, in exceptional
circumstances (Domestic/IBG Proposals), if the exposures in excess of the above norms are to be
considered, the approval from the respective sanctioning authority should be obtained as a template item.
6. BUs may obtain specific approval from MD of the Vertical for the borrower/ borrower group for exempting
the Borrower/Borrower group from the above norms. However, in such cases, exposures shall be
governed by RBI Large Exposure norms and credit supply to Large Borrower through Market
Mechanism.
7. Passive Breaches (Individual): An action plan for complying with exposure norms, with timeline
not exceeding three years should be included in the sanction note at the time of immediate review.
Deviation, if any, to be approved by the sanctioning authority as a template item.
8. Passive Breaches (Group): An action plan with timeline not exceeding three years for bringing
the exposure within the limit should be put up by the Business Unit (which is having banking relationship
with the flagship entity) to CCCC for approval. The approved action plan should be circulated to all other
BUs/ Branches who are having Banking relationship with other entities of the Group. Deviation (including
additional exposure to existing entity or new entity in a group), if any, to be approved by CCCC.
9. The review shall be put up by CRMD to Central Board on Half Yearly basis.

For FOs, Ceiling for Non-Indian Corporate (Individual/Group borrower) shall be US$ 150 mio or its equivalent
for credit proposals falling within the discretionary powers of committees below Corporate Centre Credit
Committee (CCCC). (This is Not applicable for Direct Exposure on Banks and DFI’s in respect of which
AGEL has been approved by ECCB). The deviations, if any, necessitated for business considerations, would
require specific approval of the ECCB.
Foreign Offices should, while fixing Single and Group Level Ceilings, take into account the local regulatory
guidelines in this regard for local assets. For India based Company, Domestic guidelines shall be applicable.

Substantial Exposure Limit

With a view to mitigate credit concentration risk, the Bank has fixed substantial exposure limits for the Large
Borrowers aligning with the Large Exposure Framework. Substantial Exposure Limits are not deemed as caps but
are intended to serve as triggers to Business Groups for closer monitoring. Therefore, breach of Substantial
Exposure level would not be construed as waiver. In respect of aggregate substantial exposures, CRMD would
be monitoring Substantial Exposure norms on a quarterly basis. The aggregate exposure levels indicated [at (ii)
and (iii] below are the maximum.
Types of Substantial Exposure Stipulation (Exposure over
and
i) Large Borrower (Single Counterparty or Group of Connected above
10% ofthe following)
Tier I Capital
Counterparties)
ii) Aggregate of Substantial Exposures to Single Borrowers Not to exceed 300% of Tier I Capital
iii) Aggregate of Substantial Exposures to Borrower Groups Not to exceed 600% of Tier I Capital

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As different entities of a Single Group may be enjoying facilities from more than one SBU, CRMD at Corporate
Centre would serve as the nodal point to monitor the substantial exposures at the whole-bank level. Reports on
all substantial exposures will therefore be collated by the CRMD and submitted for information at annual intervals
to Central Board and at quarterly intervals to RMCB. The periodic review is intended to serve as an internal
control mechanism to prevent excessive concentration of high value assets.

Further, the benchmarks will serve as a trigger to the respective BUs for closer scrutiny.
Exposure at Portfolio Level

Unsecured Exposure:
RBI has defined unsecured exposure as an exposure where the realizable value of the security (primary plus
collateral), as assessed by the Bank / approved valuers / RBI’s inspecting officers, is ab-initio not more than 10%
of the outstanding exposure. Security will mean tangible security properly charged to the Bank and will not
include intangible securities like guarantees, comfort letters etc. The Bank has adopted the above definition
and it has been decided to restrict unsecured exposure (Domestic + IBG) so defined to 30% of Bank’s
(FB+NFB+Non SLR investment of Domestic and IBG) total exposure. CRMD will submit quarterly reviews in
this regard to the RMCB.

Term Loan Exposure:

The CRMD will review term exposures (loans with residual maturity of over three years) at half yearly intervals
with a view to ensuring that there is no Asset – Liability mismatch beyond the permissible limits and appropriate
ceilings may be fixed in case of potential mismatch breaching the tolerance limits. The ALCO will decide the
quantum of term exposures which can be taken in various time buckets, in April & September each year. The
tenor for scheme specific term loans (e.g., Housing Loan, Education loans etc.) should be as per the approved
schemes which can be a maximum of 30 years. In other cases, it will be 20 years or life of the Project whichever
is lower (with a minimum tail period of 15%). The tenor is to be considered from the day of first drawdown.

Term Loans (loans with residual maturity of over three years) at any point of time should not in aggregate exceed
40% of the total advances of the Bank. A trigger for review is set when this limit reaches to 38 % of the total
advances of the Bank. CRMD will put up the review to CRMC at Half Yearly intervals.
Exposure to Real Estate Sector
Bank’s exposure to real estate (including residential mortgages, commercial real estate and indirect finance etc.,)
will not exceed 33% of the Bank’s total advances. Within the overall ceiling of 33%, the limits for sub- segments
(Presently for i.e., Residential Mortgages -23%, Indirect exposures- 5.5%, Other Commercial Real Estate
(OCRE)- 3%, Infra Related Commercial Real Estate (ICRE)-1.5%) must be adhered to). The exposure to entities
for setting up Special Economic Zones (SEZs) or for acquisition of units in SEZs which include real estate
would be treated as exposure to Commercial Real Estate sector for the purpose of risk weight and capital
adequacy. Quarterly review shall be submitted to ACB by CRMD.

Intra – Group Exposure

To contain concentration and contagion risks arising out of Intra Group Transactions of Exposure (ITEs), certain
quantitative limits on financial ITEs and prudential measures for the non-financial ITEs have been imposed as
under:
i) Exposure should include credit exposure (funded and non-funded credit limits) and investment exposure
(Including underwriting and similar commitments). However, e x p o s u r e on account of equity and other
regulatory capital instruments should be excluded while computing exposure to group entities.

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ii) Prudential Limits on Intra-Group Exposure:
I) Single Group Entity Exposure
5% of Paid-up Capital and Reserves in case of non-financial companies and unregulated financial services
companies. 10% of Paid-up Capital and Reserves in case of regulated financial services companies.
II) Aggregate Group Exposure
i) 10% of Paid-up Capital and Reserves in case of all non-financial companies and unregulated financial services
companies taken together
ii) 20% of Paid-up Capital and Reserves in case of the Group i.e. all group entities (financial and non-financial)
taken together.
[Intra-group Exposures exempted from the LEF (financial and non-financial) in terms of RBI guidelines to be
excluded].
A quarterly report of Intra Group Transactions of Exposures (ITEs) of the Bank will be submitted by the
Enterprise and Group Risk Management Committee (EGRMC) to the Risk Management Committee of the Board
(RMCB).
Non Fund Based Exposure
Non Fund Based facility not to exceed 100 % Bank’s total fund based exposure. Review of NFB facility to be
carried out by CPMD at quarterly intervals, as hitherto.

Sectoral/ Industry Exposure

In order to reduce Concentration Risk, the Bank shall endeavour to restrict exposure to an industry/Sector upto
15% of the Bank’s Total Domestic Exposure (TDE).

RAIL (Risk Adjusted Industry Limit) Framework: This Framework have fixed Maximum Industry Exposure
ceiling to be 200% of Tier- 1 Capital of the Bank (to be within Loan Policy prescription of 15% of Bank’s
TDE). However, maximum industry exposure ceiling to Private sector entities within the overall Industry
exposure ceiling not to exceed 90% of Tier-I Capital of the Bank with no interchangeability from Public Sector to
Private Sector.
Exposure ceiling specific to each Industry / Sector: Risk Management Department (RMD) prescribes RAIL (as
percentage of Bank’s TDE) for each of the Industry/ Sector arrived based on major factors like Outlook, Portfolio
Quality Index (PQI), Industry PD (Probability of Default) and growth of specific Industry / Sector in Bank’s
exposure. This RAIL specific to each Industry / Sector is fixed within 200% of Tier-1 Capital.
RAIL is fixed for Industries / Sector with exposure more than Rs 7,500 Cr. However, considering the expected
demand for lending to Industries / Sectors, with exposure upto Rs. 7,500 Cr but higher than Rs. 5,000 Cr; RAIL
can be fixed. RAIL for Industries are reviewed on half yearly basis and approved by RMCB.
Except for ECCB, no Sanctioning Authority have discretion to approve any breach of RAIL. In case, Headroom
is not available for any Industry/Sector, operating functionaries may approach BUs. BUs in turn will approach
RMD (along with Rationale and suggestive Risk Mitigates) on consolidated basis with regard to additional
headroom of any industry. CRMC/DMD & CRO may provide additional headroom.

Review of the Outlook and CRA / ECR Threshold prescribed for Industry / Sector shall be done by CRMD at
yearly intervals or at a lesser frequency if significant change occurs in the Industry profile, as hitherto.

Specific concentration limit for top 10 exposures as well as single borrower exposures have also been fixed for
Sectors/ Industries, as detailed under:
a. In case of industries, where exposure is >1% of Bank’s Total Domestic Exposure (BTDE), exposures to Top
10 companies should not be more than 75% of Industry /Sector exposure.
b. In case of industries, where exposure is > 0.75% of Bank’s Total Domestic Exposure (BTDE), exposure to

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single borrower should not be more than 50% of Industry /Sector exposure. It is to be noted that the
exposures under Specific Concentration Limit will be within Large Exposure Norms of RBI.
Exclusion from Specific Concentration limit: Top 10 exposure to exclude exposure on Autonomous bodies
promoted by Central Govt. / Profit making Central PSUs (Maharatna / Navaratna/Miniratna)/ SPV promoted by
Profit making Central PSUs (Maharatna / Navaratna/Miniratna)/ State Govt./ PSUs guaranteed by Central Govt./
State Govt. institutions/ State PSUs guaratnted by State Governments (irrespective of CRA/ECR). Detail
guidelines have been put in place in this regard.

Further, considering the long gestation periods in the infrastructure sector, it is considered prudent to cap exposure
to that sector at 30 % of the Bank’s total domestic exposure. Any waiver from the above ceilings is to be approved
by ECCB. Half yearly review shall be submitted to CRMC by CRMD.
FOs shall endeavour to restrict fund based and non-fund based exposure to a particular industry within the ceiling
of 15% of Bank’s total fund and non-fund based exposure. FOs may, after considering the prevailing economic
scenario and industry outlook as also host country regulations and Risk Department (IBG) guidelines, workout
industry wise threshold/ceiling accordingly.
Considering the risks involved in exposure to Commercial Real Estate (CRE) and Hospitality Sectors, prior
administrative approval for taking / continuing exposure under these sectors should be obtained by FOs as per
the laid down structure.

Considering the high level of exposures to certain industries / areas of business at certain centres, prudential
exposure norms have been set for the FOs concerned.

Industry Exposure settings and Monitoring of Industry Exposures

CRMD (Industry Research) conducts study of industries/ sectors, where the Bank’s exposure is 0.25% and above
of the Bank’s total domestic exposure. As of now, CRMD (Industry Research) conducts study of 39 such
industries/sectors. It prescribes formula driven RAIL ceilings (within 15% of the Bank’s TDE) for these
industries/ sectors along with outlook and policy prescriptions based on risk and performance of portfolios in
large / significant sectors, and issues advisories on a periodic basis for guidance of the Business Verticals.
Outlook and CRA / ECR thresholds of Industries with exposure more than Rs 5,000 Cr are approved by CRMC
/ RMCB at the time of Annual review. Industries with exposure less than Rs 5000 Cr (within 39 Industries tracked
by CRMD) is approved by DMD & CRO.

In case of IBG, the exposure reckoned for the purpose would be that in relation to Indian Corporates lying within
the identified industries/sectors.

A “Risk Committee (R Com)” at each important Overseas Centre, having representation of Credit and Treasury
Sections of the FO would study the market / environment on a regular basis to monitor all risk exposure settings
and compliance with control measures.

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 DUE DILIGENCE, STATUTORY AND OTHER RESTRICTIONS ON LOANS & ADVANCES

All credit proposals are subjected to due diligence processes in regard to the credentials of the borrower, purpose
of the loan, financial position of the borrower, need based requirement of credit facilities for working capital and
capital expenditure, capability to service the loans and security offered. The loan proposals should normally be
supported by a request letter/ application duly signed by an authorised person of the borrowing unit. In case of
renewal at existing level/reduced level, if request letter is not available, arrangement letter/letter of continuity is
to be exchanged with the borrower(s) / guarantor(s).

Careful selection of borrowers is essential to maintain asset quality. Hence, scrutiny of past credit history of all
Borrowers/Promoters/Directors/Guarantors needs to be carried out with a view to being satisfied about their
credentials, and for ensuring compliance with the guidelines on KYC and AML under Prevention of Money
Laundering Act or similar such act of host country. Due diligence in relation to promoters and management
should also reckon/cover aspects like experience, professionalism, integrity, vision, track record of meeting
commitments to lenders, industry experience, history of strategic initiatives, governance practices and record of
adherence to covenants. Bank's approach in granting credit facilities to companies whose directors are in the
Defaulters' List of RBI / Credit Information Companies/SEBI Banned list / CRILC/ NeSL (Information Utility
set up under IBC)/ IBBI/ NCLT Central Fraud Registry of RBI etc. is also to be taken care of.

The due diligence on Corporate Borrowers shall include identification of beneficial owners and screening against
applicable list of sanctioned entities. Reasons for change in the accounting year as well as in auditors, if any, should
be ascertained.

FOs should access database of CIBIL like Bureaus, Central Banks or other agencies in their geography of
operation and mention the findings in the sanction proposal.

Legal Entity Identifier (LEI) is a 20 digit unique code that identifies every legal entity (across the globe) or
structure that is party to a financial transaction, in any jurisdiction. Obtention of Legal Entity Identifier (LEI) has
been made mandatory by RBI for the Borrowers having total fund based and non fund-based exposure of Rs. 50
Cr and above. For exposure above Rs. 5 Cr and upto Rs. 50 Cr, LEI will be implemented whenever RBI’s
instructions are issued.
FOs to ensure implementation as per their local regulations for the local company. For the India based
Company, the RBI guidelines in this regard shall be applicable.

There are many established groups having multiple companies/SPVs/JVs dealing with the Bank. For such groups,
the approach for obtention of CIR on group companies shall be as follows:
a. CIR(s) shall be mandatory for all Group Concern(s) having borrowing arrangements from Banks/ FIs and
having ECR of below BBB i.e. below investment grade or are unrated.
b. CIR(s) shall also be mandatory for all the Group Concerns whose names appear in any of the
defaulters/SMA/Caution/RBI Fraud Registry/Red Flagged Accounts/NeSL/ CRILC list.
c. For Group Concerns having borrowing arrangements with Banks/FIs outside India and have ECR below
investment grade or are unrated, all out efforts have to be made for obtention of CIRs from their respective lenders.
In case of inability to obtain CIRs on account of secrecy/privacy laws/regulations in those countries or any other
genuine reason, CGM (CAG/CCG/PF&S SBU/IBG) may permit waiver from obtention of CIRs of Group
Concerns. But in all such cases Credit/Opinion Reports from Credit Agencies like Dun & Bradstreet (D&B) has
to be obtained.

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d. For others, CGM (CAG/CCG/PF&S SBU/IBG) may permit waiver from obtention of CIRs of Group Concerns
from Banks and FIs on a case to case basis, provided the due diligence procedure (as outlined in e below) to
check the credentials/conduct of accounts has been meticulously followed and recorded in the proposal. Such
groups will have to be pre identified with the approval of CGM (CAG/CCG/PF&S SBU/IBG).
e. Further, as part of due diligence procedure, in cases where obtention of CIR of Group concerns from Banks/FIs
is waived, CIR may be compiled by the Credit Analyst on the basis of information sourced from CRILC/ MCA/
CIBIL/ NeSL/Other public forums.
The detailed guidelines in this regard have been put in place.
Financial Due Diligence
i) The financials of the main company and its major associate / sister concerns should be reviewed, as far as
possible, on the basis of audited financials of the concerns on a common date.
ii) Balance Sheet should be free from any material adverse remarks of the auditors. Any adverse comments
must be separately discussed in the evaluation / appraisal process. Iii) Verification of Income Tax, GST return
etc. must also be ensured.
iv) Authenticity of the documents/ reports/ certificates etc. issued by Chartered Accountants is to be verified from
the link https://udin.icai.org with UDIN and key field provided by the certifying Chartered Accountants.

Bank’s approach towards extension of credit facilities to wilful defaulters in CICs report/SEBI banned list of
Promoters/ Non Co-operative borrowers is as under:
Credit facilities to units appearing in the 'Wilful No fresh limits / enhancement be sanctioned.
defaulters' list of CICs/ Non Co-operative borrowers or However, an authority not below CCCC/IBGCC
Credit facilities to applicant companies whose directors may approve renewal/ continuation of existing limits.
are in the ‘Wilful Defaulters’ list of CICs report /SEBI
banned list of Promoters.

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PERFORMANCE/FINANCIAL ANALYSIS AND CREDIT RISK ASSESSMENT

The primary objective of financial statement analysis is to understand and diagnose the information contained in
financial statements with a view to judge the profitability, financial soundness, and operational efficiency of
management of the firm to make forecast about its future prospects.

As part of Bank’s appraisal process, financial statements – profit and loss account, balance sheet and cash flow
statement of the borrowing units are analysed to determine its solvency, liquidity and profitability as well as its
sources and applications of funds. In addition, financial analysis involves extrapolating the past performance of
a borrowing entity so as to arrive at an estimate of its likely future performance. Various ratios are calculated by
studying past 2 years’ performance of the unit and comparing them to analyse the trend. Inter firm comparison
should also be done to determine performance and financials of the unit vis-à- vis its peers.
Audited Financials
Audited financials along with Tax Audit Report (i.e. Form 3CA, Form 3CB or 3CD) and annual reports covering
Auditor’s Report (Companies Auditor Report Order, wherever applicable) are to be obtained from the Borrowing
units each year and analysed as part of due-diligence and monitoring.
Audited Financials shall be mandatory for all Corporate Borrowers. However, mandatory audit of accounts by
CAs may not be insisted upon by the Bank for non-Corporate borrowers with exposures less than Rs. 50 lacs
from Banking System.
For New Connections: The Audited Financial Statements should generally be not more than 12 months old from
the date of close of the relative Financial Year.
In case the latest audited financials are more than 9 months old and upto 18 months, provisional financial
statements not more than 6 months old are to be obtained and analysed and to be satisfied that the activity level,
profitability, liquidity and solvency ratios are broadly in alignment with the estimates/ projections.

No new connections are to be entertained if audited financials are more than 18 months old. Detailed guidelines
have been put in place.
For Existing Connections: In case of listed companies, review/ renewal shall be carried out based on audited
financials not more than 15 months old and unaudited financials not more than 6 months old. In case of unlisted
borrowers, review/ renewal shall be carried out based on audited financials not more than 18 months old and
provisional financials not more than 5/6 months old.

No review/ renewal is to be permitted if audited financials are more than 15 months old for listed companies and
18 months old for unlisted borrowers as the case may be and only continuation of working capital limits may be
permitted. Detailed guidelines have been put in place.

In respect of exposures to unlisted PSUs/ Government undertakings, Sanction of loans, review / renewal of limits
(with or without enhancement) can be carried out based on the Financial statements certified by Internal/Statutory
Auditors and there is no need to wait for the completion of Comptroller & Auditor General Audit, wherever
applicable.

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However, non obtention of Audited financials should be discussed as a part of the assessment with proper
justification along with the timeline for its obtention. No specific approval from Competent Authority is required
to be obtained.
In all such cases, Audited financials has to be obtained subsequently and CRA is to be worked out.

Ministry of Corporate Affairs, on 16.02.2015 notified the Companies (Indian Accounting Standards) Rules, 2015
to converge the current Indian Accounting Standards (IAS) with the International Financial Reporting Standards
(IFRS) and Ind AS is made applicable to companies in a phased manner as under:
a) All companies with net worth>= Rs. 500 Cr: FY 2016-17
b) All companies with net worth>= Rs. 250 Cr: FY 2017-18
c) Listed companies with net worth< Rs. 250 Cr: FY 2017-18
d) Unlisted companies with networth < Rs. 250 Cr: Not applicable

Performance and Financial analysis

The Bank has a unified CRA System for different Industry/ Sector, which is used for assessing the credit risk of
borrowers as well as facilities. Each CRA Model has specified Ratio Band for each Financial Parameter for
assigning Score. The Ratio Band at which the highest Scores are awarded shall be considered as Desirable level.
Desirable level is indicative level as there cannot be a definite benchmark, as desirable levels are case specific,
guided by the nature, size and scope of projects and activities. The operating functionaries shall provide
justification as part of the proposal for all the financial parameters where the unit has not achieved the desirable
level. The sanctioning authority shall consider variations, if any, from these levels based on the justifications
placed before them. No specific approval from the Sanctioning Authority is required to be obtained in this regard.
In respect of twenty six specific industries viz. Hydrocarbon, Power, Iron & Steel, Textiles, Electrical Equipment,
Telecom, Construction, Aluminium, Food Processing, Real Estate and Fertilisers, NBFC etc. where the Bank has
exposure of Rs. 10,000 crores (FB+NFB) and above, separate sets of benchmarks for financial parameters have
been set. In case there is any variation from the acceptable and the actual levels, such deviation shall be discussed
as part of proposal with proper justification. No specific approval from the Sanctioning Authority is required to
be obtained in this regard

The following have been implemented w.e.f 01.10.2019:

a. Investment in Associates/Subsidiaries normally to be permitted only upto the extent of TOL/Adj.TNW does not
breach the desired level of 4 in case of Manufacturing Sector and 5 in the case of Trade and Services sector.
Deviation, if any, needs approval from Sanctioning Authority as a template item.
b. Further, 20% of the Corporate Guarantee extended by the Company in favour of Associates/Subsidiaries or
any other companies for securing credit facilities or otherwise to form part of total outside liabilities for the
purpose of calculating financial ratios.

5.3.2 Promoter’s shares in the borrowing entity (Listed as well as unlisted Companies) should not be pledged to
any Bank/NBFC/Institution without prior consent of the Bank. This is a mandatory covenant and should be tested
Half Yearly.

5.3.3 In the wake of subsidiarisation, analysing financials of the Group at the consolidated level in addition to
the standalone entity is necessary. In the case of companies with subsidiaries, the adjusted TNW could be lower
for the parent company and the rating may suffer on account of the investment. In all such cases where the Group
consists of large number of companies the leverage should be measured by Consolidated TOL/Consolidated
TNW. In those cases, where the loan is being taken in the books of Parent/Holding

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Company but subsidiary companies are the operating units, the standalone financial statements of subsidiaries (if
available) should also be analysed and commented upon in the loan proposal.

Inter Firm Comparison

There are several agencies which have built databases on companies and industries which serve as useful sources
of information on business profiles, promoters, industries and sectors and for inter firm comparison. Use of reports
or data should be from reliable sources like CMIE, CRISIL etc., and their names should be mentioned in the loan
proposals.
Internal Credit Rating – Credit Risk Assessment (CRA)
For each credit proposal, a credit rating is assigned using the internal credit rating system. The Bank as of now
has a unified CRA System, which is used for assessing the credit risk of borrowers as well as facilities (facility
rating applicable for exposures beyond Rs.5 crores/ USD 1 Mio or its equivalent from Banking System) viz.,
working capital, term loan and non-fund based exposures etc., to C&I, SME and AGL segments for total exposure
of Rs.50 lacs/ US$ 100 K and above from Banking System and scoring models for all products with exposure of
less than Rs.50 lacs/ US$ 100 K from Banking System .
Based on the CRA score, risk rating (SB-1 to SB-15) is awarded to the entity. The SB-16 rating is assigned to
NPA accounts by default.
For exposure of Rs. 50 lacs/US$ 100 k and above and upto Rs.5 crores/ USD 1 Mio or its equivalent from
Banking System, CRA shall not be required where CUE rating is applicable.
CRA- Minimum scores / Hurdle rates
The CRA models adopted by the Bank take into account various risks categorized broadly into financial, business,
industry and management risks as well as the environmental, demographic and governance aspects of borrowing
entities. These risks are rated separately.

Hurdle rate SB-10 has been prescribed under internal risk rating model for considering new connection or
enhancement in credit limits. In case account is having CRA SB-11 and worse, subject to exceptions like
availability of Central Govt. guarantee (sovereign guarantees) and / or availability of a Corporate guarantee of
parent / Group Company which should have a CRA rating of SB-9 and better, necessary approval is to be obtained
from the competent authority. However, no specific approval from Competent Authority is required to be obtained
for continuation of limits at existing or reduced levels when CRA is below hurdle rate. This should be discussed
as part of the assessment with proper justification.

Further, where a unit has not obtained minimum scores in Financial Risk, Business & Industry Risk and
Management Risk under CRA are to be discussed in the loan proposal and justifications/mitigation are to be
placed before the sanctioning authority for taking informed decision. No specific approval from competent
Authority is required to be obtained in this regard.
The actual models used, the minimum scores under each head, the hurdle rates, etc. are reviewed at regular
intervals by CRMD.

Validation of Risk Rating

The credit risk rating will be arrived at by the respective Branch/ Foreign Office or the Credit Processing Cell, as
applicable, as soon as the audited financials of the Company is received. The internal credit risk rating thus arrived
at will be independently validated and approved by a separate Committee / Risk Rater as the case may be, set up
for this purpose. This process of validation and approval is completed prior to sanction/

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renewal/ enhancement of the credit facilities, and is distinct from the loan sanction process. This facilitates
independent and objective risk rating, without being influenced by operational/ budgetary considerations.

CRA Rating for Restructured/ NPA Accounts

i) Restructured accounts under standard category need to be rated under appropriate CRA models as per extant
instructions as long as they are classified as standard assets. However, CRA rating exercise is not required to be
carried out when such restructured accounts turn NPA and default grade rating of SB-16 shall be assigned directly.
ii) All non-performing assets (NPA) shall be directly assigned with the rating of SB-16 or respective default
grades in case of other rating/ scoring models. In such cases, regular CRA exercise is not required to be carried out.
However, when the status of the account is upgraded to standard, CRA rating of the borrower should be made
SB15 till dynamic rating / full fledged CRA is completed. However, new CRA rating shall be applicable from
the date of upgradation.

Dynamic Review of Rating

With a view to capturing deterioration in credit quality through the process of internal credit rating in timely
manner, framework for dynamic review of internal rating has been introduced. Dynamic Review of Internal
Rating of borrowers who are enjoying aggregate limits of Rs. 500 Crores/ USD 80 Mio or its equivalent and
above in all Business Groups, including those in IBG, is to be ensured at half yearly intervals (without trigger).
In case of borrowers with exposure of Rs. 10 Crores & above but below Rs. 500 crores, Dynamic Review of the
rating to be conducted as and when triggers are observed. This framework shall be applicable to borrowers rated
under CUE model. This is to enable the operating units to initiate corrective action including exit from the exposure
and ensure correct pricing as per the risk undertaken etc. All review reports including SMA reports should be put
up after dynamic review rating in all applicable cases. Borrowers with Maharatna or Navaratna status are exempted
from the purview of non- trigger based dynamic review of ratings provided there is no change in their status
(Maharatna and Navaratna Status). These limits may be reviewed from time to time by CRMD.

Review of CRA
CRA of borrowal units is required to be reviewed periodically. For units which are assigned CRA rating upto SB-
10, CRA is to be reviewed annually. For units having CRA SB-11 and worse, Dynamic Rating will be carried out
at half-yearly intervals. Annual review based on audited financial statements will continue to be done for all
exposures as per original time schedule, irrespective of dynamic / half yearly review. These benchmarks may be
reviewed from time to time by CRMD.
In respect of exposures on Indian corporates, the Foreign Offices would not be required to carry out a separate
CRA exercise. The CRA assessment and validation done by the domestic office would be relied upon by the
Foreign Offices. The renewal exercise can proceed simultaneously or follow subsequently.

External Credit Rating (ECR) 5%

Besides, the internal risk rating (CRA), it is mandatory to obtain External Credit Rating (ECR) of borrower for
all exposures above Rs. 50 crores from Banking System from any one of the accredited ECRAs. However, product
specific schemes (e.g., Asset Backed Loan, e-VFS etc.), will continue to be governed by the specific norms of
the scheme. In respect of exposure of Rs. 50 crores from Banking System and below, if rated, concessionary
pricing may be extended to BBB- & better rated borrowers. Borrowers with expired ECR shall be treated as
unrated and CRA linked interest shall be charged. The ECR is also to be incorporated in the proposal.

All eligible exposures above Rs. 50 Cr or USD equivalent from Banking System should ideally be rated by any
one of the approved International Credit Rating Agencies (IRAs) viz. Moody’s, Standard & Poor and FITCH.
IBG may notify countries where external rating is not available. In such case all eligibility would be as per Internal
rating.

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At present there are seven (7) ECR Agencies namely CARE, CRISIL, India Ratings and Research Private Limited
(India Ratings), ICRA, Brickwork, SMERA and INFOMERICS are accredited by RBI for the purpose of risk
weighting the Bank’s claim for computation of Capital adequacy. Any waiver/ deferment for obtention of ECR
is to be approved by the sanctioning authority not below RCCC. In case of ECCB sanction, such waiver is to be
sought from CCCC.

The approval for deferment of obtention of ECR permitted, if any, shall not be normally more than 6 months.

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 ASSESSMENT OF CREDIT FACILITIES

The Bank has in place a well-established process of credit appraisal that has developed and evolved over a period
of time. The fundamental purpose of credit appraisal in the Bank has been two fold. First, to be able to take an
informed decision as to the credit worthiness of any proposal; that is, whether it is prudent, worthwhile and
desirable for the Bank to take a credit exposure on the applicant entity. Thereafter, where a positive decision is
arrived at in this regard, to be able to assess the extent and nature of such credit exposure, the conditions on which
such exposures is acceptable and the pricing at which it is considered prudent to operationalize such a credit
relationship.

A decision as to the credit worthiness of a proposal is arrived at after considering a combination of several factors
including:
i) an assessment of the promoter, covering their background and relevant experience in the area of the
proposed entity,
ii) the previous experience of the bank with the promoters or their group,
iii) Complete information on Take Over/ New Management including regulatory compliance and impact of
Change in Management Control,
iv) the perceived prospects of the industry or activity proposed,
v) the already existing extent and quality of the exposure of the Bank to the industry or activity on the one hand
and to the promoters/ group on the other,
vi) policy relating to exposure levels and norms prescribed by the regulators and by the bank for the proposed
activity / industry,
vii) the perceived financial strength and the risk rating of the promoters, the borrowing entity and / or the
group,
viii) the extent and nature of credit risk mitigants proposed, etc.

Having decided that the proposal, as a reasonable and acceptable business risk, is a ‘bankable’ proposition, the
next step involves assessing the nature and extent of the proposed exposure. The Bank provides a range of debt
instruments including all types of term and working capital facilities, each of which can be structured either as
fund based products or non-fund based products or a combination of both. It is our effort to combine these with
a range of ‘payment and collection platforms’ that are off the shelf or tailor- made to meet individual requirements
and seek to provide our customers with a complete solution to all their financial requirements.

With a view to avoiding `Lenders’ Liability’, no branch/FO should give any verbal or in-principle commitment
to lend to a prospective borrower, FB or NFB facilities, unless detailed appraisal has been made and proper
sanction is in place. However, an in-principle quote/broad term sheet could be given in deserving cases with the
approval of DMD of the vertical.
Further, Business verticals shall not canvas any business for a product or start a process before approval of
OPC/CPPC. Additionally, GITC should be advised by BVs to activate/ deactivate product codes as per the
approval of OPC/CPPC to ensure against account opening before launch and after closure.

Credit Review Department (CRD) has been set-up (at Circle level and Corporate Centre level) to look at micro-
level risks at an individual proposal level and strengthen role of credit risk by moving from advisory to risk
clearance (i.e. “Go/No-Go”) based on pre-defined metrics on risk appetite.

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Methods of Assessment of Credit Facility (ies)
i) The assessment of working capital is done through a) Turnover Method
b) Projected Balance Sheet Method (PBS)
c) Cash Budget Method.

ii) Under the turnover method, working capital requirement is computed at a minimum of 25% of turnover, of
which, at least four-fifths is provided by the Bank and balance one-fifth represents the borrower’s contribution
towards margin for working capital. This method is applicable for sanction of fund based working capital limit of
up to Rs.5 crores or equivalent, as per recommendations of Nayak Committee which had looked into issues
relating to financing of Medium & Small Enterprises.

iii) Under the PBS method, the fund requirement is computed on the basis of borrower’s projected balance sheet,
the funds flow planned for the current/ following year and examination of the profitability and financial
parameters etc. The key determinants for the limit can, inter-alia, be the extent of financing support required
by the borrower and the acceptability of the borrower’s overall financial position including the projected level of
liquidity. The projected Bank borrowing thus arrived at, is termed ‘Assessed Bank Finance’ (ABF). This method
is applicable for borrowers who are engaged in manufacturing, services and trading activities and who require
fund based working capital (WC) finance of above Rs.5 crores or equivalent.

iv) Cash Budget method is used for assessing working capital finance for seasonal industries like sugar, tea and
construction activity. This method is also used for sanction of ad-hoc WC limits. In these cases, the required
finance is quantified from the projected cash flows, and not from the projected values of current assets and current
liabilities. Other aspects of assessment like examination of funds flow, profitability, financial parameters etc.,
are also carried out.

Review/ Renewal of Advances

Working capital facilities are granted for a period of one year from the date of sanction. Regular/ ad hoc credit
limits are 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 the borrowers, the branch
should furnish evidence to show that renewal/ review exercise is in progress. However, where the regular/ad
hoc credit limits have not been reviewed/renewed within 180 days from the due date/ date of ad hoc sanction, it
will render the account as NPA. In this context, other guidelines are as under:
i) Renewal of working capital limit is carried out every year on the basis of audited financials. In case working
capital, limits are not renewed for valid reasons, approval from the sanctioning authority needs to be sought for
review (continuation of limits) for a maximum period of 180 days from the due date. In respect of working capital
limits sanctioned by ECCB, such approval needs to be sought from CCCC.
ii) In case even after expiry of this period of 180 days a full-scale renewal is not completed, approval needs
to be sought from the sanctioning authority for review (continuation of limits) for a further period of maximum
90 days. Within this time the regular renewal proposal must be completed.
iii) The maximum period for which the credit facilities extended to a unit may be continued, based on reviews,
will thus generally not exceed 270 days from the due date.
iv) Even after the expiry of this period of 270 days from the due date a full-scale renewal is not found feasible, the
authority structure for approving continuation of such proposal shall be the next higher authority for the proposal
upto the sanctioning power of CLCC and sanctioning authority for the proposal within the sanctioning power of
RCCC and above.
However, if proposal is submitted for full fledged renewal/enhancement either before or after the expiry of
270 days, the authority for continuing the limit for intervening period and sanction/renewal shall be the

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sanctioning authority.
v) For units having CRA SB-11 and worse, ad-hoc/Short review will be carried out after 6 months from the date
of sanction based on the provisional financials not older than 3 months. (Not applicable for autonomous bodies
promoted by Central Government/ profit making Central PSUs (Maharatna/Navratna/Miniratna)/ SPVs promoted
by profit making Central PSUs (Maharatna/Navratna/Miniratna)/ PSUs guaranteed by Central Government/ State
Government institutions/ State PSUs guaranteed by State Governments).
vi) While undertaking review /renewal, sanction for continuation of limits shall indicate date of validity of such
limits.
vii) In the case of all listed companies, a brief review is to be put up on the basis of quarterly working results
published by them in the Quarterly Results Report (QRR) format, duly incorporating comments such as extent of
exposure, conduct of the account etc. Such review is to be submitted (a) to the Heads of Verticals in respect of
ECCB sanctions, (b) to the CGM (Circle)/ CGM (CAG)/ CGM (CCG)/ CGM (SARG)/ CGM (IBG) in respect of
IBGCC/ IBGCC-II/ CCSC & CCCC sanctions and (c) to the GM (Network/ CCGRO or CCG Branch/ SARG)/
Head of FOCC in all other cases.
viii) In cases where term loans as well as working credit facilities have been sanctioned to a borrower, review
of TL should form a part of the review/renewal of working capital facilities.
ix) Builder Loans (sanctioned as CC/OD limits) and standalone TLs are also to be reviewed annually based on
the audited financials.
x) In respect of syndicated loans, apart from annual review, these loans are required to be reviewed quarterly
or at earlier intervals, wherever warranted at Foreign Office Credit Committee level, based on the credit
ratings/market reports, quarterly results, status of compliance with financial covenants etc., and exception report
submitted to IBG where necessary.
xi) The Guidelines have been put in place for processing the request for large enhancement in working capital
within 12 months of last sanction or during next renewal. Repeated enhancements between two renewals (within
12 months) to be avoided.

Loan System for Delivery of Bank Credit

In respect of Domestic borrowers having aggregate fund based working capital limit of Rs. 150 Cr and above
from the Banking System, drawing shall be allowed first from Working Capital loan component, upto a
minimum threshold level (i.e., 60%). Drawings in excess of minimum Working Capital loan component shall be
the from of cash Credit facility.

Exemptions:
a. Credit facilities extended to State Government/ Union Territory agencies and Food Corporation of India for
procurement/ price support activities.
b. Credit facilities extended to Central Counter parties.
c. Credit facilities extended by overseas branches of Indian Banks.
Detailed guidelines in this regard have been put in place
Term Loans
i) The tenor for scheme specific term loans (e.g., Housing Term Loan, Education loans etc.) should be as per the
approved schemes which can be a maximum of 30 years. In other cases, it will be 20 years or life of the Project
whichever is lower (with a minimum tail period of 15%). The tenor is to be considered from the day of first
drawdown.
In the event of an increase in rate of interest of Home Loans, extension of loan tenure upto 5 years (7 years in
COVID-19 cases) beyond the original tenure (i.e., upto 35 years or 37 years in COVID-19 cases) may be
permitted while keeping the EMI unchanged.
Normally, the average maturity of any term loan, including moratorium, should not exceed 10 years, except loans
under Resoultion Plan / Core Industry / Infrastructure / Renewable Energy Projects / Securitization of Rent and
Toll Receivables.
Average maturity should invariably be calculated for all the term loans individually and mentioned in the template

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while seeking sanction from the Sanctioning Authority. It is not applicable for term loans having EMI based
repayment programme.
ii) In cases where average maturity of term loan exceeds 10 years (except in case of exempted categories
mentioned above), the deviation may be permitted by the Sanctioning Authority. However, it will not require
specific template approval and it should be discussed as part of the assessment with proper justification in the
proposal.
Longer period project loans, where average maturity period exceeds 10 years, the sanction may provide for
refinance option (call/ put) preferably at the end of 5th or 7th year. Such refinancing should normally not be more
than 7 years.
iii) In respect of term loans, the computation of cost estimates is scrutinized very carefully to ensure that the total
project cost arrived at is accurate, comprehensive, reasonable and realistic and benchmarked against projects of
similar nature. The cost should be verified on the basis of proforma invoices and, wherever required, support
from Bank empanelled consultants should be taken to verify the reasonableness of the cost of project.
iv) The advance payments received by the contractors should normally be used for the specific project against which
it has been received. Utilisation of funds otherwise should be allowed only with prior arrangement with the Bank.
Waiver may be considered only very selectively for reputed contractors.
v)Term Loans sanctioned and not availed within six months from the date of sanction need revalidation.
vi) Normally, term loan may be financed in the ratio of 70:30 for debt and equity, though ideally 67:33 is
preferred. The sanctioning authority may consider variation from these levels based in justifications provided. No
specific approval is required for divergence between the accepted and actual levels.

Letters of Credit for Working Capital (Manufacturing/Trade)

Some of the aspects to be kept sight of while opening Letters of Credit (LC) are:
i) Cash budget should be obtained, where considered necessary, to ensure that the borrower would be able to
retire the bills drawn under the LC on their respective due dates.
ii) It is also to be ensured that the LC limits sanctioned for regular requirements of the borrower such as purchase
of Raw Materials are not used for CAPEX or other purposes.
iii) The LCs issued/limits sanctioned should be commensurate with the borrower’s turnover and Cash Credit
limits, and should be for genuine trade / manufacturing activity.
iv) The usance period of the LC should have relation to the working capital cycle. v) Level of inventory is to be
commensurate with industry norms / past trends.
vi) Appropriate cash margin depending on the applicant’s means, creditworthiness, other liabilities, etc. may
be prescribed. Further, wherever warranted, a lien may be maintained on the unutilised portion of the cash credit
account for the value of the bills to be received under the LC.

Letters of Credit for Capex

LCs can be established for payment to suppliers of capital goods, within the sanctioned term finance. Since such
LCs are a mode of disbursement of sanctioned term finance, there is no increase in the Bank’s exposure. Lien is to
be marked in the term loan account for the outstanding LC and, ideally, the margin on such LCs should be the
same as per the accepted financing pattern.

In cases where LC is partially or fully backed by the LC / funding commitment from other banks/ financial
institutions, such commitment should be irrevocable and unconditional. If such LC / funding commitment is in
relation to Import LC, the risk on account of forex rate risk shall also be to the account of the other bank / FI, and
there should not be any ambiguity in this regard. Further such LCs should be within the approved exposure limit
for the banks. For institutions, specific approval for taking exposure needs to be obtained from sanctioning
authority.

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For import LCs, unless liability under LC is to be settled out of foreign currency funds arranged by the borrower,
requisite hedging must be in place.

Discounting of Bills under Letters of Credit

i) Discounting of bills under Letters of Credit should be only in relation to LCs issued by us / First Class Banks
(Domestic) and Approved Foreign Banks and should not exceed the approved exposure limits on these banks. ii)
Purchase/discount/negotiation bills under LCs should be done only in respect of genuine commercial and trade
transactions of the borrower constituents who have been sanctioned regular credit facilities by the bank.
iii) The prescription would not, however, prohibit the Bank from accepting bankable business from non- borrower
constituents such as Govt. / Research / Defence / Educational organizations and other statutory organizations who
have no borrowing arrangements with any FI / bank.
iv) It is also not the intention of the Bank to turn down acceptable bill discounting business against LCs of First-
Class banks / Approved Foreign Banks, from borrowers who may not be dealing with us for their other banking
requirements. However, in the interest of fostering better lending discipline as also in the overall interest of the
Bank, SOP on the subject is put in place.
v) It is further to ensure that
a. Limits against bills discounted under LC is sanctioned by the appropriate authority, b. Bills are in strict
compliance with the guidelines
c. SOP is to be followed strictly.
Exposure against Bills Discounted under Letter of Credit (LC)
In cases of bills discounted/purchased/negotiated under other bank LC, and where the payment to beneficiary is
not made ‘Under Reserve’, the exposure shall be treated as being on the LC issuing bank and not on the third
party / borrower. In the case of negotiations ‘Under Reserve’, the exposure should be treated as on the borrower. In
cases where the bills are discounted / purchased / negotiated under LC issued by one of our own branches, the
exposure shall be reckoned as being on the third party/borrower.

Bank Guarantees
Bank guarantees are required to be issued for various purposes- a few examples being Bid Bonds for bidding for
projects or contracts, advance payment guarantees for mobilisation money received by contractors, performance
and retention money guarantees, guarantees in favour of government and statutory bodies, courts etc.

There is no difference between due diligence for bank guarantees as compared to other credit facilities and the
instructions in regard to credit rating, proper assessment of nature and quantum of bank guarantee facility, cash
margin, collateral security, standing and means of the borrower/ promoters/ directors/ guarantors etc. are
applicable. A few other instructions are as under:
i. Bank can issue both financial and performance guarantees. However, before issuing performance
guarantees, operating units are required to exercise more than ordinary caution in assessing capability of the
applicant in term of fulfilling the underlying performance.
ii. BGs will generally be issued / renewed for a period not exceeding 18 months at any one instance.
For longer periods, authority structure for according administrative clearance is in place. Should a BG originally
issued for a lesser period require extension beyond 18 months, administrative clearance therefor will also be
necessary. No BG should normally have a maturity of more than ten years. Bank may consider issuing BGs beyond
maturity of 10 years only against 100% cash margin or with prior approval of the competent authority specified
in this regard.
iii. The claim period of Bank Guarantees (fresh or extension) shall invariably be specified, minimum of
one year from the date of expiry of validity period.

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Guarantees and co-acceptances favouring FIs / banks /other lending agencies

I) As guaranteeing Bank
i) As per RBI guidelines, Banks may issue guarantees favouring Fis/ other banks/ other lending agencies for loans
extended by them. However, given the funding capabilities of our Bank, such guarantees are not proposed
to be issued for domestic operations. The Bank will also not undertake the business of co- acceptance of bills of
its constituents.
ii) Bank may freely give on behalf of their customers and overseas branches and correspondents, guarantees
in the ordinary course of business in respect of missing or defective documents, authenticity of signatures and for
other similar purposes for domestic operations only.
iii) In case of defective documents, BGs may be issued in cases of a) Discrepant documents, and b) Document
issued without proper authority.
iv) In all other cases which are not covered in iii) (a) & iii) (b) above, the BGs may be issued only after obtaining
prior approval of the sanctioning authority.

II) As Lending Bank

i) Bank may extend fund based and non-fund based credit facilities against guarantees issued by other
Banks/Fis.
ii) The exposures assumed against such guarantees will be deemed as an exposure on the guaranteeing banks /
Fis and would be subject to GBEL on other banks and FIs in place in the Bank. A sub-limit for such exposures
may be fixed within the overall GBEL as part of the exercise being undertaken annually. Annual review exercise
is to be undertaken by Credit Risk Management Department and put up to CRMC. However, the review of PGEL
may also be carried out as and when required.
ii) The exposures assumed against such guarantees will be deemed as an exposure on the guaranteeing banks /
FIs and would be subject to GBEL on other banks and FIs in place in the Bank.

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 TAKEOVER OF ADVANCES

In the competitive and liberalised financial environment, it has become important for the Bank to aggressively market
for good quality advances. One of the strategies for increasing good quality assets in the Bank’s loan portfolio is to
take over advances from other Banks/FIs.

Laying down of uniform take-over norms in an international environment where financial products, systems and risks
vary from centre to centre is neither desirable nor feasible. Each Foreign Office would thus lay down certain broad
parameters in respect of takeover of accounts in their Credit Policy Document. While laying down Centre specific
norms, the Offices may keep in mind the guidelines mentioned in the Bank’s loan policy.

Norms for Takeover of Advance Accounts

Careful selection of borrowers is essential to maintain asset quality. All credit proposals are subjected to due diligence
processes in regard to the credentials of the borrower, financial soundness of the borrower, ascertaining need based
requirement of credit facilities, capability to service the loans and security offered etc. Besides these usual due
diligence, some additional safeguards are prescribed for takeover of advances. Accordingly, a set of norms/ guidelines
for C&I, SME and AGL (Agro based industrial activities) segments have been laid down for takeover of loans. These
are being reviewed from time to time. The Broader guidelines in this regard are as under:

Rating criterion

i) For exposures up to Rs. 5 cr or its USD equivalent from the Banking System:
CUE rating of the borrower should be CUE-7 or better (SB-7 or better if not processed though project
Vivek).
ii) For exposures above Rs. 5 Cr and up to Rs. 50 Cr or its USD equivalent from the Banking System:
CRA of the borrower should be SB-7 or better.
iii) For exposures above Rs. 50 Cr or its USD equivalent from the Banking system:
ECR of the borrower for the existing exposure should be BBB (not BBB-) or better. The ECR for the enhanced
exposure will have to be obtained within a period of 6 months.

Note: Wherever Credit Rating Agency is changed, justification including compliance of regulatory guidelines
(i.e., SEBI etc.), if any, to be provided in the proposal.
Collateral Security: It must be ensured that the existing security with the Bank (from where the account is being
taken over) is maintained and no dilution in existing security coverage is permitted for the amount taken over, by
releasing the existing security charged to the existing banks. In case Takeover is with enhancement/sanction
of additional facilities, the collateral cover for additional credit facilities sanctioned should be as per the norms
prescribed by the Bank. Substitution of existing security given to other Banks may be permitted for justifiable
reasons by the sanctioning authority, provided the realizable value of the security offered is not less than the value
of existing security with other banks. Specific approval of appropriate authority will need to be obtained.

It must be ensured that the cushion is available as per industry exposure norms and the credit rating hurdle rates
specified, if any, for the industry segment are complied with.

Audited Balance Sheet (ABS) should generally be not more than 12 months. If ABS is older than 9 months and upto 18
months old, provisional financials not older than 6 months are to be obtained and analysed so as to be satisfied
that the activity level and profitability, liquidity and solvency ratios are broadly in alignment with the estimates /
projections. The take over is not permitted if ABS is more than 18 months and no deviation shall be permitted in this
regard. Detailed guidelines in this regard have been put in place. Ideally, only such accounts should be targeted for
Takeover where the unit is in commercial operations for at least two years (one year in case of Infrastructure projects)
and no major green field / brown field project is under implementation.

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The unit should have been earning profits for at least 2 preceding years except Infrastructure projects for which it
will be 1 year after COD as per the last audited balance sheet and should not be incurring losses during the year as
per provisional financials (7.1.6 above). The outlook for sales and profitability should be positive based on realistic
estimates of capacity utilization and EBIDTA margins as on the date of assessment.

Stock and Receivables Audit is to be conducted prior to disbursement of any credit facilities above Rs. 5.00 Cr /USD
1 Mio or its equivalent except for units having CRA rating of SB-5 and better.

Increase in exposure (working capital only) should not exceed 25% at the time of take over from other
Banks. However, this cap is not applicable for the companies:
i. Externally rated “A-“ and better for the consecutive past two years for the borrowers whose exposures is above Rs.
50 Cr/USD 10 Mio or its equivalent from Banking System and
ii. CRA 5 or better for the exposures upto Rs. 50 Cr/USD 10 Mio or its equivalent from Banking System.
However, in case the borrower has ECR, the rating should be A- and better.

Enhancement at the time of subsequent renewals will be based on guidelines issued by the Bank from time to time.
Deviation, if any, in this regard, authority structure is in place for approval.

Pricing improvement over the existing pricing of other banks should be offered only for accounts meeting rating
criterion for Takeover specified in 7.1.2 above.

Authority Structure for Waiver

Waiver in norms for takeover and authority structure for approval:
i) Cases of past default / Caution List / OTS / restructuring / rehabilitation etc., subject to the proposal otherwise
being in compliance with RBI instructions regarding cooling period etc.: Waiver to be approved by ECCB.

ii) Any other waiver except Proposal falling within the sanctioning power Sanctioning and Approving
item no. (i) above [Rating of Authority
criterion, CRA and other Credit Committees below RCCC/ upto FOCC RCCC/FOCC VII
Takeover norms] VII
RCCC/ FOCC VII/ CCSC/ IBGCC-II/ IBGCC Sanctioning Authority
and
CCCC
ECCB CCCC

A written communication should be obtained from existing bank indicating the up to date dues on payment of
which all the securities held ( including release of personal/corporate guarantees) will be released in favour
of our Bank.

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Security should be Created and Perfected within 90 days of disbursement. Specific timeline in this regard is to be
appraised to the Sanctioning Authority as part of the proposal.
Consortium / Multiple Banking Arrangement (MBA):
a. The Following shall not be considered as Take over of Advances from Another Bank and as such take over
norms shall not be applicable:
i) when we join a consortium as an additional member or
ii) When we join a consortium and exposure of an existing member is taken over partly / wholly or iii) When we
join MBA to take additional exposure or
iv) Enhancement/ additional facility where we are already part of Consortium/ MBA
In all such cases, operating units should ascertain IRAC status of the borrower from the existing bankers on the
IBA specified format.
b. However, when we join or increase our share in MBA in order to replace an existing member exposure either in
whole or in part, all the norms relating to T akeover of advances will apply.
Takeover norms would apply even if borrower offers to liquidate existing credit facilities before disbursement
by our Bank. However, if there is a time gap of say 2 months between liquidation of existing facilities and
disbursement by our Bank, the Takeover norms would not apply.
The above norms shall not be applicable in case there is a change of promoter under resolution of stressed assets or
substitution of existing promoter in respect of infrastructure projects. In such cases, it has to be considered as
a new connection and the credibility of new incoming promoters as well as techno economic viability will be key
considerations.

Validity of the sanction shall be 3 months from the date of conveying sanction.

The abovementioned Takeover norms are not applicable to AGL segment for which separate norms have been
prescribed as per para 7.2 below. These norms are also not applicable in respect of:
i. Autonomous bodies promoted by Central Government/ Profit making Central PSUs
(Maharatna/Navratna/Miniratna)/ SPVs promoted by Profit making Central PSUs
(Maharatna/Navratna/Miniratna)/ PSUs guaranteed by Central Government/ State Government institutions/ State
PSUs guaranteed by State Governments.
ii. loans under PER segment
iii. schematic lending such as Lease Rental Discounting (LRD), ABL and ABL (CRE) etc.

Norms for takeover of advances under Agriculture segment (other than Agro based industries for which
norms contained above are applicable)
In respect of Agriculture segment, all agricultural Term loans and agricultural cash credits with other banks and
Agricultural Credit Societies, Co-operatives are eligible for takeover, subject to the fulfillment of the following
terms and conditions of Take over:
i) The minimum amount eligible for takeover would be as under:
Nature of Facility Amount
ACC Rs.1 Lac
ATL– for Allied Activities Rs.10 Lacs
ATL for other than allied activities Rs.2 Lacs.

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ii) The maximum amount eligible for takeover would be Rs.2 crores. However, administrative clearance
should be obtained from CLCC for loans above Rs.2 crores and upto Rs.5 crores and from RCCC for loans above
Rs.5 crores.
iii) No prior administrative clearance is required for takeover of agricultural loan. The reasons for takeover of
account are to be discussed in the proposal based on which the Sanctioning Authority will take an informed
decision.
iv) No dilution in the security in takeover proposals is permitted.
v) Only Standard Assets and regular accounts are eligible for takeover. The account should have been a
standard account in the books of the other banks/Financial Institution (FI) during the preceding 2 years.
vi) The term loans of incomplete nature are not eligible for takeover.
vii) ATLs with a minimum 2 years repayment program left are only eligible.
viii) Advances to borrowers falling outside the ‘Service Area’ of the branch are also permitted for takeover,
subject to adherence of the other instructions.
ix) Crop loans converted to Term Loans and Term Loans, which are re-phased, are not eligible for takeover
irrespective of their quantum.
x) Additional norms for takeover of Agriculture Loans of Rs.50 lacs and above: -
a) The advances to be taken over should be rated SB-7 or better (the unit should score at least 60% in the
financial parameters).
b) The unit should have earned net profits post tax in each of the immediately preceding 2 years.

Takeover of “P” segment advances is permitted as per the guidelines issued from time to time by the
Business Units (PBBU/REHBU).

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 PRICING OF LOANS

Pricing of Bank’s funds and services while being basically market driven, is also determined by two important
considerations, i.e., minimum desired profitability and risk inherent in the transaction. At the Corporate /FO level,
the applicable price for a particular advance or service is fixed taking into account the actual/marginal cost of
Bank’s/FOs funds and desired rate of return as calculated from indices like profitability levels and return on
capital employed. In case of corporate relationship where the value of connections and overall potential for
profitability from a particular account are more important than a particular transaction, the price is fine-tuned
even to breakeven level for the transaction. For long term exposures, the factors that weigh are the rate charged
by the financial institutions / other banks, the period of exposure, the pattern of volatility in interest rates and
expected movement of the rates in the long-term perspective. The card rates for interest and service charges are
linked to External Credit Rating and internal risk rating whereby better rated companies get cheaper rates. In select
cases, the Bank may also use external Benchmark for fixing interest rates.

Pricing Tool: A pricing tool named DIPAK (Digital Interface for Pricing and Knowledge Capture) has been
rolled out for better pricing negotiations with corporate customers and shall be applicable for borrowers with
exposure (FB+NFB) of Rs. 50 Cr and above.

The Bank has also adopted an appropriate authority structure to facilitate competitive pricing of loan products.
The authority concerned while exercising the discretion takes into consideration the risk rating of the loan asset,
the trends in movement of interest rates, market competition and overall business considerations. Various Credit
Committees/ Sanctioning Authorities and other officials have been vested with powers for approving competitive
pricing within the respective areas of operation. The quantum of delegation depends on factors such as degree of
competition, market developments, target group, purpose, value of connection, income from cross sell, accounts
under restructuring/corrective action plan etc. Benchmark ROCC / RAROC is the other consideration in pricing
of fund based and non-fund based credit facilities. All competitive/concessional pricing on credit facilities need
to be approved by the Appropriate Authority. The policy on competitive pricing is reviewed from time to time
based on changes in market conditions. Authority is delegated to Credit Committees / BVs for extending
concession in pricing / service charges for well rated corporates which will be reviewed from time to time.

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 DELEGATION OF FINANCIAL POWERS

The Bank has a well-defined system of delegation of financial powers, duly approved by the Board of the Bank,
to sanction/approve credit facilities. The terms and conditions/covenants governing any lending arrangement are
also well defined. No credit facility can be extended to any borrower unless duly sanctioned by the designated
sanctioning authority/committee. All loans and advances in the Bank are to be sanctioned by the designated
sanctioning authority. In exercising the powers, the authorities concerned are required to ensure compliance with
the relevant provisions of the State Bank of India Act and the State Bank of India General Regulations, regulatory
guidelines of Reserve Bank of India and any other regulations, and any rules/ regulations/ instructions/ orders
issued from time to time by the Bank.

The three significant principles around which the scheme of delegation of financial powers revolves are:
i) powers are exercisable only in relation to the duties and responsibilities specially entrusted to a
functionary;
ii) all sanctions are subject to report to the next higher authority;
iii) No sanction/approval should be given beyond the delegated powers. In case of an emergency situation, where
it is not possible to obtain prior sanction/approval of the designated sanctioning authority and a delay in taking
decision may not be in the interest of the Bank, sanction/approval beyond the delegated powers may be accorded
judiciously, with prior administrative approval of controlling authority. For sanctions/approval of ECCB, prior
administrative approval of Chairman has to be obtained. Post facto sanction/approval of the designated
sanctioning authority should be obtained along with confirmation of action, without any delay (within maximum
30 days). The above enabler is to be used only in exceptional circumstances and should not be used
indiscriminately or frequently.

The Scheme of Delegation of Financial powers for advances and allied matters in the Bank has a graded authority
structure. The Executive Committee of the Central Board (ECCB) has full powers for sanctioning credit facilities.
The sanctioning powers have been delegated down the line to ‘Committees of officials’ viz. CLCC at Circle level,
FOCC IV, FOCC V, FOCC VI, FOCC VII at FO level, IBGCC II, IBGCC, RCCC, CCSC, CCCC at Corporate
Centre. A committee viz., ‘CCCCC’ is constituted at Corporate Centre for controlling all approvals of CCCC,
except in the matter of enhancement and fresh sanction of limits, which will continue to be put up to ECCB for
control.

The delegation of financial powers for sanctioning credit facilities by various authorities is based on total exposure
of the Bank to the borrower.

Higher discretionary powers have been made available in the case of top-rated borrowers (usually AAA rated
units whose industry outlook is positive and /or SB1 to SB5) and functionaries across the hierarchy are vested
with such dual powers depending on the risk rating of the borrower as detailed below:
i) AAA rated units where Bank’s Industry Outlook is Positive (CRMD): Credit Committees shall exercise 125%
of the financial powers vested with them.
ii) AAA rated units/ Govt. of India guaranteed accounts/ GoI Departments/ GoI undertakings: The financial
powers of various Credit Committees as applicable to SB-I to SB-5 rated borrowers shall be applicable to AAA
rated units/ Govt. of India guaranteed accounts (only where the entire exposure is guaranteed) /GoI
Departments/ GoI undertakings of Maharatna category only, irrespective of their CRA ratings.

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Deviation/Waiver
Sanctions should normally be accorded as per Specific products/ Schemes. However, deviations/waivers in
general norms such as eligibility criteria, quantum of finance, tenor of the loan, etc.
(other than those to be approved by ECCB), albeit within the provisions of loan policy guidelines are required
to be permitted, at times on business or strategic considerations.
The schemes/ products normally specify the Authority Structure for approval of such deviations/waivers.
However, in respect of Deviations/Waivers, where authority structure has not been specified, the authority for
approving such deviations/ waivers shall be the Sanctioning Authority not below CLCC (DMD of the Vertical
for PB and REH proposals other than Builder Finance).

Any deviation/ waiver should be only in highly deserving cases on a selective basis so as to keep it at the
minimum.

9.7 Organizational Planning and Systems & Procedures (OP & SP) Department will review the delegation of
financial powers from time to time, as necessary, to factor in the demands made on account of organizational
restructuring, emerging challenges, forces of competition, etc.

*****

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 SECURITY, INSURANCE, COVENANTS AND DOCUMENTS

Primary Security
Primary security is the asset created out of the credit facility extended to the borrower and / or which are directly
associated with the business / project of the borrower. For example, hypothecation of stocks, book debts etc. for
working capital loans and Plant and Machinery etc. for Term Loans. Stocks include Raw Materials, Stock in
process, Finished Goods, Spares etc. Book debts are based on invoices and delivery challans. Hypothecation is
the established practice whereby a borrower offers to the lender charge on an asset as security for a loan, while
retaining ownership of the asset and enjoying the benefits therefrom. With hypothecation, the lender has the right
to seize the asset if the borrower cannot service the loan as stipulated by the terms in the loan agreement.

Collateral Security
Collateral security is any security, other than Primary Security, offered to additionally secure the credit facilities
sanctioned by the Bank. Collateral security is normally obtained as a risk mitigating measure and to sustain the
promoters’ interest in the venture.
Wherever, Collateral security from third party is obtained, personal/corporate guarantee of owner of
collateral security is desirable.
Further, if third party collateral is from Corporate (Non individual) entity, a detailed due diligence should be done
on the financial of the corporate to look for any financial stress/insolvency.

For MSE Sector (both Manufacturing and Services enterprises) no collateral security is to be obtained for loans
upto Rs. 10 lacs, and for loans above Rs. 10 lacs and up to Rs. 15 lacs the sanctioning authority may consider
waiving collateral security subject to compliance with certain conditions. For this sector, the Bank has decided
to cover all eligible SME advances upto Rs. 200 lacs (manufacturing and services) and upto Rs.
100 lacs (retail trade) under CGTMSE scheme. The cost of guarantee i.e., Annual Guarantee Fee (AGF) shall
be borne by the borrower for all loans (CC &TL) sanctioned on or after 01.07.2017 (irrespective of the amount,
including renewal of Cash Credit facilities). The matter of recovery, or absorption, of guarantee fee by the Bank
is reviewed from time to time.

CGTMSE has introduced “Hybrid Security” product, wherein collateral security can be obtained for a part of the
credit facility whereas remaining part of credit facility, upto a maximum of Rs. 200 lacs (manufacturing and
service) and upto Rs. 100 lacs (retail trade) can be covered under CGTMSE scheme.
Guidelines in this regard have been put in place.

Advances to non farm enterprises in Manufacturing, Trading and Services with credit limits upto Rs. 10 lacs are
normally classified under Pradhan Mantri Mudra yojana (PMMY) and covered under Credit Guarantee Fund for
Micro Units (CGFMU). Guidelines in this regard have been put in place.

Other borrowers may be sanctioned credit facilities under Bank’s regular schemes.

As regards Agriculture segment, waiver is generally permitted for loans upto Rs. 1,60,000/- (Rupees One Lac
sixty thousand only) though there are scheme specific ceilings in this regard. In other cases, with exception of
specified categories like trade advances where obtention of collateral security is prescribed as a part of the scheme,
obtention/ waiver of collateral security is a discretion to be exercised by the sanctioning authority. This decision is
required to be taken on a case-to-case basis. While doing so, the following points need to be kept in view:
i) Viability of the project per se will be the paramount requirement and available collateral may be taken.
ii) A distinction may be made between new and existing connections while deciding/ insisting on collateral /
additional collateral security.

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Pledge of Shares
Section 19 (2) of the Banking Regulation Act, 1949 states as under: -
“Save as provided in sub-section (1), no banking company shall hold shares in any company, whether as pledgee,
mortgagee or absolute owner, of an amount exceeding thirty per cent of the paid-up share capital of that company
or thirty per cent of its own paid-up share capital and reserves, whichever is less”. The detailed guidelines on
cases requiring mandatory pledge of shares have been put in place.

Section 19 (3) of the Banking Regulation Act, 1949 states as under: -

“Save as provided in sub-section (1) and notwithstanding anything contained in sub-section (2), a banking
company shall not, after the expiry of one year from the date of the commencement of this Act, hold shares,
whether as pledgee, mortgagee or absolute owner, in any company in the management of which any managing
director or manager of the banking company is in any manner concerned or interested”. Reporting mechanism for
the above has been put in place.

Assessment of Valuation of Multiple Properties dispersed over various locations- Discount to assessed
realizable value of the Collateral Security:
There are instances where the collateral offered is an aggregation of charge on several properties at various
locations. In such cases, where the number of properties is in excess of 10 (ten), a notional discount @ 5% is to
be applied on the aggregate “Realisable Value” of the properties and the discounted value should be considered
while calculating the security coverage in the credit proposal. Discretion in regard to acceptance of larger numbers
of property as well as the discount to be notionally reckoned, has been vested with the Sanctioning Authority.

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 FOLLOW UP, SUPERVISION AND MONITORING OF ADVANCES

The Bank has in place comprehensive post-sanction processes aimed at enabling efficient and effective credit
management. Broadly, the objectives of post-sanction follow up, supervision and monitoring, and some of the
key areas that need to be kept sight of are:
i) Where sanctions are based on projections, periodic comparison of projections with actuals is most important.
ii) Ensuring end use of funds for which sanction has been accorded. While requisite instructions and
procedures to this end have been laid down, it would be the primary responsibility of the borrower to ensure that
the funds borrowed have been utilized for the purpose for which they have been lent by the Bank. To this end,
the Bank may seek verification, by way of auditor’s certificate, Board Resolution and by way of any other
acceptable means.
iii) Comparing the account outstanding to the assets level on a continuing basis.
iv) Detecting non-compliance/ waivers, from terms and conditions of the sanction and taking appropriate
action to safeguard the Bank’s interest.
v) Ensuring recovery of installments of the principal in case of term loans as per the scheduled repayment
programme.
vi) Examination of exception reports and reports in the nature of early warning signals.
vii) If the Early Warning Signals indicate possibility of any fraudulent transaction, such accounts may be
considered for classification as Red Flagged Accounts and reported as per RBI guidelines.
viii) Compliance with all internal and external reporting requirements for credit discipline.
ix) If irregularity in an account persists for longer period, or occurs repeatedly, the credit facilities may need to
be re-assessed and the issues appropriately addressed.
x) In case of Consortium/Multiple Banking Arrangements, there must be regular exchange of information by and
between the banks involved.
xi) Ensuring that the borrowing entity with Cash Credit / Overdraft facilities does not have any current
accounts with us and or any other banks unless such current accounts are stipulated under various statutes and
instructions of other regulators/ regulatory departments. The guidelines issued by RBI in this regard from time to
time to be followed.
xii) Monitoring of trade related transactions, issuance of LC/BG and investment in Related Parties/ Group
Companies.

The undernoted are a set of broad, general guidelines that have a bearing on the monitoring, supervision
and follow up aspects of credit administration, and thus need to be complied with care:
i) Each and every sanction should be reported for control to the next higher authority/ designated authority.
Going forward, in order to have a more robust system which can help in Portfolio Level Control, the existing
format of individual control report shall be replaced with a consolidated system generated “Sanction Analysis
Report” covering details of sanctions/ approvals accorded by a credit committee in a particular meeting. SAR shall
be put up as one single agenda item to the next higher committee (as in case of control report) for perusal and
recording their observations/ suggestions to the sanctioning committee concerned.
ii) Safe preservation of security documents and ensuring their validity and enforceability in a court of law are areas
that must not be lost sight of.
iii) Before disbursement of loans/ credit facilities, a certificate regarding compliance with terms and conditions
of the sanction should be placed before the branch head, as per laid down instructions without fail.

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iv) Monitoring of large withdrawals with a view to ensuring that they are not unrelated to the unit’s normal
activity.
v) Follow up for timely submission of Statements of Stocks and Book Debts, and their careful scrutiny, for correct
computation of Drawing Power.
vi) Verification of assets
vii) Where Lender’s Independent Engineer (LIE) has been appointed, clarity in scope of work must be ensured and
reports are to be submitted directly to the Bank. Reports are to be examined carefully and any developments
/ observations of note / material significance brought to the attention of the borrowing unit, as well as of the
branch head.
viii) Where limits have been allocated, allocatee branch must strictly adhere to the terms and conditions
advised by the home branch.
ix) Follow up for timely submission of FFRs/QRRs/ Management Information Reports and their scrutiny and
analysis to see that performance is in line with estimates / projections. If at significant variance, appropriate
corrective steps to be initiated.
x) Seeking cash flow statements on quarterly or more frequent basis and their careful analysis in respect of units
financed on cash budget method.
xi) Provisional Financials for the immediate preceding quarter to be obtained, analysed and comments
furnished in proposals.
xii) Adhering to the norms for conduct of Stock and Receivable Audit.
xiii) Engagement of agency for conduct of Forensic Audit in identified cases warranting such measure. xiv)
Review and Management of Stressed Assets
xv) Corrective Action Plan for Stressed Assets (CAPSA): Reporting irregularity for confirmation and Review
of SMAs.
xvi) Agencies for Specialised Monitoring (ASM): Applicable for large borrowers with total exposure above
Rs. 250 Cr exposures from Banking system. Detailed guidelines in this regard have been put in place.

Early Review of Sanctions (ERS)

With a view to improving the quality of sourcing, pre-sanction process and capturing at an early stage the critical
risks in sanction, a system of quick review of sanctions has been put in place. ERS is overseen by the Internal
Audit Department and covers review of all loans. It has been covered in two Variants:
a. Early Review of Sanction (Small Loans- SL): It covers sanctions above Rs. 1.00 Cr and upto Rs. 20.00 Cr.
b. Early Review of Sanction (Large Loans- LL): It Covers sanctions above Rs. 20.00 Cr.

Loan Review Format that are in use for both the variants shall continue, subject to periodical review/ revision, as
deemed fit.

Risk Focused Credit Audit (RFCA)

Covers all Credit Auditable Accounts (CAAs) (including LC Bill Discounting limits whether it is on stand-alone
basis or sanctioned as part of the existing limits) with total credit exposure (FB+NFB limits) above Rs. 20 Cr/
USD 2 mio or its equivalent and above. However, take over advances (accounts with exposure of Rs. 10 Cr and
upto Rs. 20 Cr) are to be covered under Risk Focused Credit Audit for the first audit and will be subsequently
covered under RFIA. The audit covers both Pre-sanction processes like Appraisal, Assessment and Sanction, and
post sanction processes like Documentation, Follow-up, Monitoring and compliance with terms of sanction. If
accounts of sister concerns/ group/ associate concerns of a CAA are in the books of the same auditee unit, they
are also covered under the Credit Audit process, even if their credit exposure is Rs.
20 Crores/ USD 2 mio or its equivalent or less.

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Legal Audit is mandatory for all exposures of Rs 5 crores and above, to verify the title deeds and other loan
documents.

Nominee Directors: The Policy on Appointment of Nominee Directors on the Boards of Companies assisted
by the Bank and guidelines are in place.

Churning of Assets: FOs should also explore the possibilities of churning their loan assets with a view to
increase the profitability and liquidity to invest in other profitable assets and effect exit from assets showing
warning signals. FOs must keep track of the development in the market and churn out assets preferably at
premium to generate additional income and unlock the funds keeping in the view the local regulatory guidelines.

For monitoring of loan books, an appropriate Management Action Trigger Policy should be framed by Each FOs
in their Loan Policy, and this should be ensured in periodical RCOM (Risk Committee) meetings. Further, Foreign
branches should include in periodic loan reviews factors such as default risk of guarantor, change of
creditworthiness of borrower, concentration risk, exchange risk and migration risk in a liquidation approach.

Management Information System based on a reliable database and development of faster communication as tools
for better overall credit risk management should be accorded due priority by all FOs.

*****

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 INCOME RECOGNITION, ASSET CLASSIFICATION. MEASUREMENT AND IMPAIRMENT OF
LOANS

The income recognition policy is objective and is based on the record of interest recovery rather than on any
subjective consideration. Likewise, the classification of a bank’s assets has to be done on the basis of objective
criteria which would ensure a uniform and consistent application of the norms. Provisioning is also to be made
based on the classification of assets, availability of security and realizable value thereof. Food Credit advances
are subject to the usual IRAC norms and Capital Adequacy requirements.

DEFINITIONS
Non-Performing Assets: An asset becomes non-performing when it ceases to generate income.

An NPA is a loan or an advance where:

i) Term Loan: Interest and/or instalment of principal remain overdue for a period of more than 90 days.
ii) Overdraft/Cash Credit: Account remains ‘out of order’- if the outstanding balance remains continuously in
excess of the sanctioned limit/drawing power for a period of 90 days or outstanding balance in the principal
operating account is less than the sanctioned limit/drawing power but there are no credits for 90 days as on the
date of Balance Sheet or credits are not enough to cover the interest debited during the same period.
iii) In case of bills purchased / discounted – the bill remains overdue (any amount is overdue to the Bank
when not paid on the due date) for a period of more than 90 days.
iv) The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops
(Agriculture segment).
v) The instalment of principal or interest thereon remains overdue for one crop season for long duration crops
(Agriculture segment).
vi) The amount of liquidity facility remains outstanding for more than 90 days, in case of a securitisation
transaction undertaken.
vii) In case of derivative transactions, the overdue receivables representing positive mark-to-market value of a
derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. viii) In
case of interest payments, an account should be classified as NPA only if the interest due and charged during any
quarter is not serviced fully within 90 days from the end of the quarter.
ix) In addition, an account may also be classified as NPA in terms of paragraph 12.4.2 below.

INCOME RECOGNITION POLICY

The income recognition policy is based on the record of recovery. Income from NPAs is not recognized on accrual
basis but is booked only when actually received. Therefore, the Bank shall not charge and take to income account
interest on any NPA. This will apply to Government guaranteed accounts also.

Interest on advances against Term Deposits, NSCs, IVPs, KVPs and Life Insurance policies may be taken to
income account on the due date, provided adequate margin is available in the accounts.

Fees and commissions earned by the Bank as a result of renegotiations or rescheduling of outstanding debts should
be recognized on an accrual basis over the period of time covered by the renegotiated or rescheduled extension
of credit.

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Reversal of income
i) If any advance, including bills purchased and discounted, becomes NPA, the entire interest accrued and
credited to income account in the past periods, should be reversed if the same is not realized. This will apply to
Government guaranteed accounts also.
ii) In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the
current period and should be reversed with respect to past periods, if uncollected.

Appropriation of recovery in NPAs

i) Interest realized on NPAs may be taken to income account provided the credits in the accounts towards interest
are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.
ii) Appropriation of recoveries in NPAs (i.e. towards principal or interest due), as per the Bank’s extant
instructions is done in accordance with following priority. a. Charges
b. Unrealized Interest
c. Interest d. Principal

Interest Application
On an account turning NPA, Bank shall reverse the interest already charged and not collected by debiting to Profit
and Loss account and stop further application of interest. However, it may continue to record such accrued interest
in a Memorandum account in Bank’s books.

ASSET CLASSIFICATION
Categories of NPAs: NPAs are to be classified into the following three categories based on the period for which
the asset has remained non-performing and the realisability of the dues:
i) Substandard Asset: An asset which has remained NPA for a period less than or equal to 12 months.
ii) Doubtful Asset: An asset which has remained in the substandard category for a period of 12 months. iii)
Loss Asset: A loss asset is one where loss has been identified by the Bank or internal or external
auditors or the RBI inspection team but the amount has not been written off wholly.

Accounts with Temporary Deficiencies: An account should not be classified as NPA merely due to the existence
of some deficiencies which are temporary in nature such as non-availability of adequate Drawing Power based
on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of
stock statements and non-renewal of the limits on the due date etc. subject to compliance of the following
guidelines:
i) Drawings in the working capital accounts are to be covered by adequate value of current assets. DP is to be
arrived at based on the current stock statement, not to be older than three months. DP computed based on the
stock statements older than three months, would be deemed irregular.
ii) A working capital account will become NPA in case of irregular drawings for a continuous period of 90 days
even though the borrowing unit is working or the borrower’s financial position is satisfactory.
iii) Regular and Adhoc credit limits need to be reviewed/ regularised not later than three months from the
due date/ date of ad-hoc sanction. In any case, an account where the regular / Adhoc credit limits have not been
reviewed/ renewed within 180 days from the due date/ date of Adhoc sanction will be treated as NPA.

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Extension of DCCO: Project Loans
Projects where implementation has been stalled primarily due to inadequacies of the existing promoters and where
subsequent change in ownership of the borrowing entity has been effected – in such cases, banks may permit
extension of DCCO up to a further period of two years in addition to the existing regulations on DCCO, without
any change in asset classification of the account. Detailed guidelines on DCCO of project loans are put in place.

Provisioning Norms
In case a bank fails to report SMA status of an account to CRILC or resorts to methods with the intent to
conceal the actual status of the account or evergreens the account, it will be subjected to, inter alia,
accelerated provisioning for that account. The normal provisioning requirement, and the accelerated
provisioning in respect of such non-performing accounts are as under:
Asset Period as NPA Normal provisioning (%) Accelerated
Classification provisioning (%)
Sub- standard Up to 6 months 15 15
(Secured) 6 months to 1 year 15 25
Sub-standard Up to 6 months 25 (other than infrastructure 25
(Unsecured ab- loans)
initio) 20 (infrastructure loans)
6 months to 1 year 25 (other than infrastructure 40
loans)
20 (infrastructure loans)
Doubtful I 2nd year 25 (secured portion) 40 (secured portion)
100 (unsecured portion) 100 (unsecured portion)

Doubtful II 3rd & 4th year 40 (secured portion) 100 for both secured
100 (unsecured portion) and unsecured portions.
Doubtful III 5th year onwards 100 100

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Loss Assets
Generally, loss assets are to be taken off Balance Sheet and to be parked in Advances Under Collection Account
(AUCA). In case loss assets are permitted to remain in the Bank’s books for any reason, a provision equivalent to
the outstanding (100 percent of outstanding) in the account shall be made.

Standard assets
Bank shall make general provision for Standard assets at the following rates for the funded outstanding on
global loan portfolio basis:
i) Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent;
ii) Advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;
iii) Advances to Commercial Real Estate – Residential Housing Sector (CRE-RH) at 0.75 per cent;
iv) All other loans and advances not included in (a) (b) and (c) above at 0.40 per cent.
v) With regard to FOs, some of the local regulatory norms on provisioning and NPAs are more stringent than RBI
norms. Accordingly, these branches will follow the stricter of the two regulatory norms (RBI/local) as applicable.

Provisioning in respect of Exposure to Wilful Defaulters

The provisioning in respect of existing loans/exposures of t h e B a n k to companies having director/s (other than
nominee directors of government/financial institutions brought on board at the time of distress), whose
name/s appear more than once in the list of willful defaulters, will be (a) 5% in cases of Standard accounts
and (b) in case of NPA account accelerated provisioning shall apply.

Provisioning in respect of fresh exposure to Non-cooperative borrowers

Any fresh exposure to Non-Cooperative borrower will by implication entail greater risk necessitating higher
provisioning. Therefore, we have to make higher provisioning as applicable to substandard assets in
respect of new loans sanctioned to such borrowers as also new loans sanctioned to any other company that
has on its board of directors any of the whole time directors/promoters of a non-cooperative borrowing company
or any firm in which such a non-cooperative borrower is in charge of management of the affairs. However, for
the purpose of asset classification and income recognition, the new loans would be treated as Standard assets.

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AUTONOMOUS BODIES PROMOTED BY CENTRAL GOVERNMENT/ PROFIT MAKING
CENTRAL PSUs (MAHARATNA/NAVRATNA/MINIRATNA)/ SPVS PROMOTED BY PROFIT
MAKING CENTRAL PSUs (MAHARATNA/NAVRATNA/MINIRATNA)/ PSUs GUARANTEED BY
CENTRAL GOVERNMENT/ STATE GOVERNMENT INSTITUTIONS/ STATE PSUs GUARANTEED
BY STATE GOVERNMENTS

Para Parameters Guidelines

No.
7.1.18 Take over norms Take over norms shall not be applicable to these entities.

3.2.b.(II) Large Exposure Entities connected with the sovereign are exempted from the definition of
Framework: group of connected Counterparties.
3.5.1 Norms for Bank Single Counterparty (Irrespective of CRA/ECR): Maximum expsoue as
Exposure - per
Internal LEF (i.e., presently 20% of Tier-I Capital, exposure to be calculated with
CCF). In exceptional cases, exposure upto additional 5% of the Tier I capital
may be permitted to single counterparty with the approval of Chairman.
Group of connected counterparties (only for PQI<5): Maximum exposure
as per LEF (i.e., 25% of Tier-I Capital which is fixed at Rs. 51,300 Cr
at present, exposure to be calculated with CCF).
3.7.6 RAIL Framework Exclusion from Specific Concentration limit: Top 10 exposure to exclude
exposure to these entiries.
5.2 Audited Financials In respect of exposures to unlisted PSUs/ Government undertakings,
Sanction of loans, review / renewal of limits (with or without enhancement)
can be carried out based on the Financial statements certified by
Internal/Statutory Auditors and there is no need to wait for the completion of
Comptroller & Auditor General Audit, wherever applicable.
However, non obtention of Audited financials should be discussed as a
part of the assessment with proper justification along with the timeline for its
obtention. No specific approval from competent Authority is required to be
obtained.
In all such cases, Audited financials has to be obtained subsequently and
CRA is to be worked out.

5.5.4 Dynamic Review Borrowers with Maharatna or Navaratna status are exempted from the
of Rating purview of non- trigger based dynamic review of ratings provided there is no
change in their status (Maharatna and Navaratna Status).
6.5.1 Ad hoc/Short For units having CRA SB-11 and worse, ad-hoc/Short review shall not be
review of account applicable to these entities.
6.5.2 Delivery of Bank As advised by RBI, Credit facilities extended to State Government/ Union
Credit Territory agencies and Food Corporation of India for procurement/ price
(Mandatory WCL support activities/ Central Counter parties have been exempted from the
delivery of Bank Credit Guidelines.
Limit)
6.22.2 Hedging Policy In respect of Central Govt Departments and Central PSEs classified as
(iii) Maharatna/Navaratna there will be no cap on Unhedged Foreign
Currency Exposures (UFCE).

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 Para Parameters Guidelines
No.
However, the cost of incremental provisioning/capital will have to be
recovered without exception, in terms of Bank’s guidelines issued from
time to time.
The above provision to be incorporated in the Arrangement Letter.
14.8 Financing (i). Maharatna PSUs are exempted from minimum Debt Equity ratio of
Infrastruture 70:30.
Projects (ii). Minimum upfront equity required for Maharatna PSUs shall be 25%
of Promotors equity commited.
8.14.2 Penal Provisions Non renewal/ Expired ECRA (beyond 15 months from the date of ECR)
wherever applicable: These entities are exempted from the penal provisions.
However, the operating units to follow up for its obtention at the earliest.

9.5 Delegation of Govt. of India guaranteed accounts/GoI Departments/ GoI

Financial Powers undertakings:
125% of the financial powers of various Credit Committees shall be
applicable to Govt. of India guaranteed accounts (only where the entire
exposure is guaranteed) /GoI Departments/ GoI undertakings of Maharatna
category only, irrespective of their CRA ratings.
10.1.2 Collateral Security Trade & Service Sector: The mandatory collateral Security norms, if any,
norms shall not be applicable to these entities.
10.1.2 Collateral The mandatory personal guarantee of directors will not be applicable to
Security- Personal Autonomous bodies promoted by Central Government/ Central PSUs
Guarantee (Maharatna/Navratna/Miniratna)/ SPVs promoted by Central PSUs
(Maharatna/Navratna/Miniratna)/ PSUs guaranteed by Central Government/
State Government institutions/ State PSUs guaranteed by State Governments.

16.1.4 Wilful Defaulter A covenant in the loan agreements, with the companies in which Bank has
significant stake, shall be incorporated by the Bank to the effect that the
borrowing company should not induct a person who is a promoter or director
on the Board of a company which has been identified as a wilful defaulter,
and that in case such person is found to be on the Board of the borrower
company, expeditious and effective steps will need to be taken for removal of
the person from its Board. Not applicable for Public Sector Undertakings
(PSUs), with majority ownership vested with the government where power to
appoint the directors on Board is not within the realm of the Company.

N.B: In respect of Policy and procedure not enumerated above, existing policy shall apply mutatis-mutandis.

*****

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 PROJECT FINANCE AND STRUCTURING STRATEGIC BUSINESS UNIT

Project term loans are more complicated in nature and require different skill sets. Recognizing the complexities
involved, project loans above a certain cut off value are handled by Project Finance & Structuring Strategic Business
Unit (PF&S SBU), specifically set up for this purpose.
14.1 Threshold limits for appraisal of proposals of Infrastructure & Non – Infrastructure projects and
criteria for reference of projects to PF&S SBU are set as under:

Sectors Threshold limit – Project Cost

Infrastructure Above Rs 250 cr
Non-Infrastructure Above Rs 750 cr

However, Proposals below the above threshold limits may be referred to PF&S SBU for vetting for additional
oversight at the specific reference of the CGM of the Circle / CGM of the Business Verticals / Sanctioning
Authority.
14.2 PF&S SBU normally monitors and controls of sanctioned project loans up to 2 years after DCCO for
infrastructure projects and 9 months after DCCO for renewable projects like Wind and Solar projects. In case of
non-infrastructure projects/ commercial projects, control of such accounts continues to vest with PF&S SBU for
a period of six months after DCCO or upto stabilisation of the project, whichever is later.
Structuring Team:
A specialized structuring team has been put in place at PF&S SBU to initiate shift towards
‘Originate to Distribute’ business model. It serves the structuring needs of all Business verticals by
playing the role of bringing different Business Verticals (CAG, CCG, IBG, GMU, R&DB) of the Bank
together, with focus on new proposals more than Rs.1000 Cr from Bank.
The objectives of the formation of structuring team are as under:
a. Providing a holistic Client centric solution to the Corporate clients across verticals/Business Units (i.e.,
CAG/CCG/GMU/IBG/ R&DB) of the Bank and
b. Maximising revenue & opportunity for the bank by structuring large proposals across Lending, Bonds,
Structure/ mezzanine finance etc.
The structuring teams shall originate deals across verticals through their own marketing efforts and shall be
responsible for end to end execution for such deals.
For existing or new to Bank corporate clients across verticals, where customized structuring solution is required,
may be referred to Structuring teams. This will ensure that a customized solution is provided to the clients with
appropriate credit/capital structuring while keeping the Returns on Equity from the transaction as a priority.
Accordingly, the approach of the structuring team shall be as under:
a. New to Bank Customer (With no prior relationship with SBI): The Structuring team shall manage the
entire process till the first disbursement and hand over the account to the identified BU/Branch. However, to
maintain continuity and future client engagement, the Structuring team shall also involve the respective BU/
Branch, once the loan is sanctioned.
b. Existing Customer of the Bank: The Structuring team shall work with the BU/ Branch where the
relationship exists and manage the credit process till sanction. The Structuring team shall hand over the account
to the BU/Branch concerned for documentation and disbursement.
Project Finance proposals, of above Rs. 1000 Cr from Bank shall require to be put up to Interim committee for
structuring as part of in-principle approval.

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 EXIT POLICY

Exit Policy for Standard Assets indicating Signs of Stress

Eligible Accounts: All Standard accounts (including SMA–0, SMA-1 and SMA-2) irrespective of External rating

Threshold Limit: The Policy shall be applicable to accounts with exposure of Rs.5 Crs and above across all
Business Verticals.

Indicative signs of stress in the accounts: The warning signals enumerated below are to be reckoned in order
to identify an exposure for an exit option.
a. Drastic fall in the performance of the Company.
b. Non-adherence to financial parameters / covenants of sanctions.
c. Critical observations in RFIA / Credit Audit / Stock & Receivable Audit etc.
d. Adverse market reports / disputes amongst Promotors / lack of commitment on the part of Management. e.
Industry / Sector (in which the Unit is engaged), is on a declining trend, and RMD approach paper/ norms too
indicate accordingly.
f. Borrower declared as Wilful Defaulter / Non-Cooperative Borrower by our Bank or any other Bank.
g. Group accounts declared as fraud or RFA by our Bank or any other Bank / Group accounts which are in distress
or are NPA / Cross Default / Any of the associates or group account declared as Wilful Defaulter by our Bank or
any other Bank / Exposure to an individual entity of a Group is high risk.

The above is an indicative list but not exhaustive. Apart from the above, guidelines on Early Warning Signals
/ Financial difficulty / Incipient Sickness and a combination of any such signals, may be considered as triggers for
examining the exit option.

Budgeting for exit option: Each Operating unit have to identify accounts for exit based on EWS alerts, Red Flags
and other triggers mentioned as above. Each Business Unit is to have an exit budget which is to be allocated to
Operating units at the time of budget allocation extending up to Branch level. A mid-year review of budget
allocated to Operating units may be done. In CAG / CCG, at the beginning of the financial year, ‘Exit Budgeting’
is to be carried out along with the annual budget exercise by the controllers. In R&DB, list of accounts identified
to be exited are to be submitted by the Branches through the Controllers to GM network and once finalised, the
approved list is to be provided to the Branches.

The aggregate of accounts identified for exit approved by the Competent Authority (i.e., Controllers for the
CAG/CCG branches and GM network for Circle) will form the Exit budget for that Operating unit. Accordingly,
budgets for Relationship Manager/ Branch/ RBO/ B&O/ Circle/ BU are to be finalized using a bottom up
approach.

Review Frequency: The status / review of accounts identified for Exit should be put up to the
Controllers not below the rank of GM, every month from the date of approval for Exit.

Dropping accounts from exit list: In case, the stress in any of the approved accounts eases, CGM (Circle) /
Business Vertical may approve removal of the account from the Exit list and also approve easing/removing
the remedial measures by restoring the normal terms and conditions.

CPM Department will be the Nodal Department. They will submit the status report to DMD &CCO at half yearly
interval and share the approved note with DMD of the Business Vertical.
Detailed guidelines for identification of accounts showing sign of weakness for remedial measures or exit have
been put in place.

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POLICY ON WILFUL DEFAULTER/ NON-CO-OPERATIVE BORROWER/ FRAUD/ DEFAULT IN
GROUP COMPANIES
Dealing with Wilful defaulters
Cut-off Limits for Identification of Wilful Defaulter
While the penal measures would normally be attracted by all the borrowers identified as wilful defaulters or the
promoters involved in diversion / siphoning of funds, keeping in view the present limit of Rs.25 lacs or its
equivalent fixed by the Central Vigilance Commission for reporting of cases of wilful default by the banks / FIs
to CICs, any wilful defaulter with an outstanding balance of Rs.25 lacs or its equivalent or above, would attract
the penal measures stipulated at paragraph as under.
Penal Measures:
The penal measures are applicable without any exception to all wilful defaulters, with an outstanding balance of
Rs.25 lacs or its equivalent and above. Details of the penal provisions are as under:
i) No additional credit facilities to be granted to the listed wilful defaulters. In addition, such companies (including
their entrepreneurs / promoters) where banks / FIs have identified siphoning / diversion of funds,
misrepresentation, falsification of accounts and fraudulent transactions is debarred from the Bank finance for
floating new ventures for a period of 5 years from the date of removal of their name from the list of Wilful defaulters
as published/disseminated by CICs.
ii) The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery of dues
shall be initiated expeditiously. The Bank shall initiate criminal proceedings against wilful defaulters, wherever
necessary.
iii) Wherever possible, the Bank shall adopt a proactive approach for identification of wilful defaulter
(including live loan accounts) and change of management of the wilfully defaulting borrowing unit.
Guarantees furnished by individuals, group companies & non-group companies
i) In cases where guarantees furnished by the companies within the Group on behalf of the wilfully defaulting units
are not honored when invoked by the banks / FIs, such Group companies should also be reckoned as wilful
defaulters.
ii) In connection with the guarantors, in terms of Section 128 of the Indian Contract Act, 1872, the liability of
the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.
Therefore, when a default is made in making repayment by the principal debtor, the Bank can proceed against the
guarantor / surety even without exhausting the remedies against the principal debtor. As such, where Bank has
made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor
is immediate. In case the said guarantor refuses to comply with the demand made by the operating unit, despite
having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter.
This treatment of non-group corporate and individual guarantors is made applicable with effect from September
9, 2014. This provision should be advised to all guarantors at the time of accepting guarantees.
A covenant in the loan agreements, with the companies in which Bank has significant stake, shall be incorporated
by the Bank to the effect that the borrowing company should not induct a person who is a promoter or director
on the Board of a company which has been identified as a wilful defaulter, and that in case such person is found
to be on the Board of the borrower company, expeditious and effective steps will need to be taken for removal of
the person from its Board. Not applicable for Public Sector Undertakings (PSUs), with majority ownership vested
with the government where power to appoint the directors on Board is not within the realm of the Company.
Bank has a transparent mechanism for the entire process so that the penal provisions are not misused, and
the scope of such discretionary powers is kept to the barest minimum. It should also be ensured that a solitary
or isolated instance is not made the basis for imposing penal action.

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Bank’s approach towards extension of credit facilities to wilful defaulters in CICs report/SEBI banned list of
Promoters is as under:
Credit facilities to units in the 'Wilful defaulters' list of No fresh limit / enhancement may be sanctioned.
CICs or Credit facilities to applicant companies whose However, an authority not below CCCC/IBGCC
directors are in the ‘Wilful Defaulters’ list of may approve renewal/ continuation of earlier
sanctioned limits.
CICs/SEBI banned list of Promoters.

Non-Cooperative Borrowers
Definition: A Non-Cooperative Borrower is one who does not engage constructively with the Bank, defaulting
in timely repayment of dues while having ability to pay, thwarting Bank’s efforts for recovery of their dues by
not providing necessary information sought, denying access to assets financed/collateral securities, obstructing
sale of securities, etc. In effect, a Non-Cooperative Borrower is a defaulter who deliberately stone walls legitimate
efforts of the Bank to recover their dues.
Authority Structure: Bank has prescribed a two-tier authority structure for classification/declassification of
Non-Cooperative Borrowers. The first tier is responsible for classification/declassification and the second for
review of such classification/declassification.
Other guidelines:
i) The cut off limit for classifying a borrower as non-cooperative is aggregate fund- based and non-fund-based
facilities Rs.5 crore or its equivalent from the Bank.
ii) A Non-Cooperative Borrower in case of a company will include, besides the company, its promoters and
directors (excluding independent directors and directors nominated by the Government and the lending
institutions).
iii) In case of business enterprises (other than companies), Non-Cooperative Borrowers would include persons
who are in-charge and responsible for the management of the affairs of the business enterprise.
vi) Bank will report information on all Non-cooperative borrowers classified as per the laid down procedure to
RBI under CRILC-Main return every month.
v) A review of the status of all Non-cooperative borrowers has to be conducted half-yearly and any proposal
for declassification should be put up to Review Committee (2nd Committee) with the recommendations of
Identification Committee (1st Committee).
vi) Removal of names from the list of Non-Cooperative Borrowers will be separately reported under CRILC
with appropriate reasoning/rationale for such removal.
Bank’s approach towards extension of credit facilities to Non-co-operative borrower in CICs report is as under:

Credit facilities to units identified/ No fresh limit / enhancement may be sanctioned. However, an
appearing i n C I C Report a s N o n -Co- authority not below CCCC/IBGCC may approve renewal/
operative borrower. continuation of earlier sanctioned limits

Frauds
Banks are vulnerable to frauds which take place when the safeguards/ procedural checks are either inadequate or
not adhered to. Perpetrators of frauds in the Bank can be both insiders and outsiders, either individually or in
collusion. As fraudsters resort to careful planning before striking the system at its most vulnerable point, Bank
has to continuously strengthen its operational practices, procedures, controls and review mechanism so that fraud
prone areas are sanitized against both internal and external breaches.

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Bank has also put in place detailed guidelines on various aspects for detection and early reporting of frauds and
taking timely actions like reporting to investigating agencies so that fraudsters are quickly brought to book,
examining staff accountability and effective fraud risk management.

Penal measures for fraudulent borrowers

The penal provisions as applicable to wilful defaulters would also apply to the fraudulent borrowers including the
promoter director(s) and other whole-time directors of the company insofar as raising of funds from the banking
system or from the capital markets by companies with which they are associated with is concerned, etc. In
particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred
from availing bank finance from Scheduled Commercial Banks, Development Financial Institutions,
Government owned NBFCs, Investment Institutions, etc., for a period of five years from the date of full payment
of the defrauded amount. The penal provisions would apply to non whole-time directors (like nominee directors
and independent directors) only in rarest cases based on conclusive proof of their complicity.

Issue of Look Out Circulars (LOC)

The recourse under LOC may be taken to prevent borrowers/ promotors/ whole time directors/ guarantors of
the defaulting companies/ units from leaving the country to escape from criminal prosecution where the loan
outstanding (fund based and non fund based) of not less than Rs. 50 Crore from the Banking system for the
person and all the entities taken together including group accounts subject to the following:
i. Fraud is (or is in the process of being) reported in any of the transactions of or dealings with any bank of the
Person or the Entity;
ii. The Person or the Entity is (or is in the process of being) declared as Wilful Defaulter: or
iii. The Person or the Entity is (or is in the process of being) identified as Non- Cooperative Borrower.
The recourse under LOC may also be considered where the loan outstanding (fund based and non fund based) is
between Rs. 3 crore and Rs. 50 Crore from the Banking system for the person and all the entities taken together
including group accounts, with the prior approval of CGM (Vertical/circle).

Exemptions:
Recourse under LOC may not be invoked/initiated in the following case:
(i) Where compromise offer of the borrower/guarantor for settlement in full and final settlement of the dues
to the Bank has already been agreed, accepted and sanctioned by the Bank and there is no default/breach/failure
on the part of the borrower/guarantor in complying with the terms of the compromise/settlement;
(ii) Where the borrower/guarantor have paid their dues to the satisfaction of the Bank.
However, Recourse under LOC would be taken in the cases under (i) above, in the event of any
default/breach/failure of the borrower/guarantor in complying with the terms of the compromise/settlement.
Detailed guidelines have been put in place.
16.5 Bank’s approach for handling Accounts of a Group where instances of Fraud/ Wilful default / Non-
Cooperative Borrower/ Promotors absconding/ Fugitive Economic Offenders
There are instances of group of companies banking with us where some of the accounts of the group are
satisfactorily conducted, while one or more accounts of the group may be showing signs of stress or their
conduct may not be satisfactory.
The application of the proposed approach for ringfencing our exposure will be triggered in the following
instances:
a. Fraud
b. Wilful Defaulter
c. Non Co-operative Borrower and
d. Promotors of the Borrower Company are Absconding/ Fugitive offenders.
No new units of a group having the aforesaid triggers in other units / companies to be onboarded. Detailed
guidelines in this regard have been put in place.

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Apply your learnings: Case let -1
XYZ Pvt. Limited needs finance for setting up of a unit for manufacturing of leather shoes. The
company was incorporated on 01.01.2019 and has been maintaining a current account with our Branch.
The promoters have approached the Branch for sanction of a term loan of Rs.4.00 Crores and working
capital of Rs. 0.50 Crores for their new unit. The company has procured land and almost completed
the construction of the factory building. The loan required by the unit is for purchase of machinery.
Mr. Meticulous obtained the relevant documents along with the detailed project report from the
applicant. As per the project report, the date of commencement of commercial operation of the unit
shall be 30.09.2020. Mr. Meticulous has prepared the CMA and is now pondering over certain
questions with plausible answers. Please help him in arriving at the correct answer.
1 Which of the following modules shall not be reckoned for arriving at the CUE rating?
A Financial Module
B Current Account Module
C Customer Information
D Bureau Module

2 What type of ratings is/ are required to be done?

A Borrower rating
B 1 Borrower rating & 1 Facility rating
C 1 Borrower rating & 2 Facility rating
D 1 and 3 are correct

3 The company proposes to export 30% of goods to a high-risk country. What can be the
possible risk mitigations?
A LC from a first-class Bank
B Export to be made against advance payment
C ECGC cover
D All the above

4 Which rating shall form the basis for CAR?

A CRA rating
B CUE rating
C Both 1 & 2
D None of the above
5 What is the best CRA rating that can be assigned to the borrower?
A SB-4
B SB-5
C SB-6
D SB-7

References :

Loan Policy for 2020-21 Loan Policy for 2020-21

****

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 BACK TO INDEX
CHAPTER-2 A

PRE-SANCTION CREDIT PROCESS

LEARNING OBJECTIVES
1) We (Banks) are the custodian of public money.
2) We collect the financial savings of the people and invest the funds in industry and
trade, financing the investment needs of the individuals and Governments also (i.e.
Credit Risk).
3) Credit risk is the possibility of the borrower reneging on his commitment to the bank.
4) So careful selection of borrower is essential to maintain asset quality.
5) Understand the importance of due diligence
6) List of steps under due diligence

Careful selection of borrower is essential to maintain asset quality. If the quality of asset is
maintained – we will be earning income and will be able to / deliver the expected result /
yield to the investors / depositors. Hence, scrutiny of past credit history of all
Borrowers/Promoters/Directors/Guarantors needs to be carried out with a view to being
satisfied about their credentials, and for ensuring compliance with the guidelines on KYC and
AML under Prevention of Money Laundering Act or similar such act of host country.

The credit process for providing any credit facility offered by the bank, can be bifurcated into
broadly two processing stages i.e.,

- Pre- sanction credit process and

- Post sanction and follow up

What is Pre-Sanction?
Pre-sanction Credit process is:

▪ Collection, Compilation, Analysis and Presentation of Information and Data in such a

manner that Sanctioning Authority should be in position to take an informed decision
▪ An Analysis on a prospective borrower to ensure that borrower discharges financial
obligation as and when required.
So it is:
- A look into the past
- An assessment of present
- A peep into the future

As the name envisages, the Pre-Sanction credit process means, the process involved up to
sanction. Right from enquiry of loan till the sanction of the proposal.

Before moving towards pre-sanction credit process in details, let us understand the
important aspects of lending i. e. Principles of lending

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There are three cardinal Principles of Lending that commercial Banks follow while taking a
decision in providing credit.

➢ Principles of Safety
➢ Principles of Liquidity
➢ Profitability

Principles to ensure safety of the funds lent are the most important one.
We all know this Principle is the most important one. It means the Borrower must repay the
loan amount with interest as per the loan agreement. Whether he/she will repay or not, this
depends upon the borrower’s capacity to repay as well as his willingness to repay. The
lending bank ensures this by satisfying himself about the adequacy and quality of the assets
charged, and also whether the business is viable enough to earn profits and make repayments.

Assessing the borrowers’ willingness to repay is a difficult job and this depends upon his
Integrity (integrity is also one of entry Barriers while assessing the Credit Risk
Rating)/honesty and sincerity, so study of Man behind the Business is important.

Principles of Liquidity
It hovers on the fact that banks mobilize funds through deposits which are repayable on
demand or over short to medium periods. Banks are, therefore, traditionally a short term
lenders. Working capital Credit for shorter period is one portion of lending. Long Term loans
need to be of limited proportions to take care of asset liability mismatch situation and
liquidity crisis.

Principles of Profitability
We (Banks) are a commercial organization with the objective to earn profit. We lend the
funds to earn income (Interest income & Fee income) out of which we pay interest to
depositors, incur operational expenses and distribute dividends to the shareholders. Rate of
Interest (our interest income), therefore, varies as per the degree of risk involved in the loan
provided to various categories of borrowers.

So as a Bank we must maintain a balance between the safety, liquidity and the profitability
aspects of a loan proposition. Banks usually do not grant loans for speculative and
unproductive purposes and have been following the practice of diversification of risk by
distributing the loan portfolio amongst different areas, customers, and different activities,
trades, services and industries.

The pre-sanction credit process comprises three stages viz., APPRAISAL, ASSESSMENT,
and SANCTION. The basic purpose of this process is to take an informed decision as to the
credit worthiness of any proposal.

Qualitative Parameters of Appraisal and Assessment of Credit process

The five C’s of Credit is a system used to gauge the creditworthiness of potential borrower.
The system weighs five characteristics of the borrower and conditions of the loan,
attempting to estimate the chance of default and, consequently, the risk of a financial loss
for the lender.

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The credit proposal shall be evaluated from the angle of the Five C's namely:

Character, Capacity, Capital, Collateral and Conditions

Character or Creditworthiness of the borrower ranks first among the Five Cs. Howsoever,
impressive may be the activity level and generation of income, unless the borrower has the
willingness to live up to his promise to repay the debt, the lender will be taking an undue
risk. The creditworthiness will be reflected by his reputation in the market, honesty and
integrity (Integrity is also one of the entry barriers while assessing the Credit Risk Rating). In
case the entrepreneurs are already in business, credit information opinion reports from their
existing bankers and report from Credit Information Companies shall be obtained and
perused. As history is the best predictor of the future, a banker will examine the personal
credit of all borrowers and guarantors involved in the loan. If there are any delinquencies,
explanations/reasons for that have to be prepared to suitably explain in the proposal.
Additionally, the Bank needs to be confident that the applicant has the background,
education, industry knowledge and experience required to successfully operate the business.
Banks may require a certain amount of management and/or ownership experience.

Capacity (cash flow) refers to the availability of sufficient Cash Flow to service the
obligation. Capacity indicates the ability of the borrowing unit to operate the business as per
their projected plans like sales level, net profit, cash profit, etc. This will require in-depth
study of the economic viability and technical feasibility of the project, capability of the
borrower and potential available for such business. This will also include the capacity of the
unit/ its promoters to bring in their margin money. The Appraisal should be based on the
viability of the projects and not only on the reputation of the promoters or directors.
Examining the payment history of current loans and expenses is an indicator of the
borrower’s reliability to make loan payments.

Capital is represented by Net worth in the Balance Sheet. Capital indicates borrower’s
contribution by way of equity/ own funds which will be brought by the unit/ promoters, to
meet a part of the project cost. It speaks about the commercial viability of the project,
outlining the various options available in financing. The banks require that the borrower
should bring in adequate margin money so that he will have a stake and interest in the
business (it shows that borrowers have ‘skin in the game’), which will also serve as cushion if
the bank has to realize the loan out of the assets.

The unit also requires funds for pre-operative expenses and making advance payments etc.,
which the banks will not generally like to finance. They should also obtain financial
statements of the borrower at the time of analyzing for the credit facilities, and also at yearly
intervals thereafter.

Collateral refers to the security available against the Bank loan. Decision makers in Credit
derive comfort from security cover/ collaterisation of a credit proposal. It is necessary to
secure the Bank’s exposure with tangible security, by way of charge on current and/or fixed
assets including immovable properties.

The security for the credit facilities shall be classified as primary and collateral. For all the
loans, with specific purpose, the assets created out of the Bank’s finance shall be taken as
primary security. In case of loans under specific schemes, such as Asset Backed Loan, Loans
to traders and services sector etc., Bank has stipulated separate collateral security norms /the

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collateral coverage shall be as stipulated in the specific schemes of the Bank. Collateral is an
important consideration, but its significance varies depending on the types of loan.

Condition refers to the Market condition

The Economic, Industry, and market Environment can and will change. The Bank will want
to know if the current conditions of the business will continue, improve or deteriorate.
Evaluation of existing market condition and assessment for futuristic scenario of the
economic conditions should be taken into considerations for taking a decision to sanction of a
loan. Furthermore, the Bank will want to know how the loan proceeds will be used – working
capital, renovations, additional equipment, etc.

. In this chapter, we will focus over the following aspect related to pre-sanction credit
process:
- Know Your Customer Guidelines
- Preliminary Appraisal and Due Diligence
- Compilation of Opinion Report

1.1 Know Your Customer:

Knowing a customer is a basic tenet in banking. KYC is the process of a business verifying
the identity of its clients and assessing their suitability, along with the potential risks of illegal
intentions towards the business relationship. KYC is also important to know the Shell
Companies.

A shell company is an entity that has no active business and usually exists only in name as a
vehicle for another company’s business operations. Shell companies therefore are
corporations that exist mainly on paper, have not physical presence, employ no one and
produce nothing. Shell companies may be used by unscrupulous elements for laundering ill-
gotten money, evading taxes and perpetuating fraud.

Businesses operate under different structures and depending on the law applicable are
classified into various legal entities. Normally, we need to do the KYC formalities of the
borrowers as per their constitution.

KYC DOCUMENTS – Individuals:

1. Individuals (Documents acceptable as proof of identity/address)
Branches/Business units shall obtain the following documents:
i. Copy of PAN Card (or Form 60) and
ii. Certified copy of Officially Valid Document (OVD) containing Identity and
Address
a. Passport
b. Driving License,
c. Proof of possession of Aadhar Number
d. Voter’s Identity Card
e. NAREGA Card
f. NPR letter
2. Minors
If minor is less than 10 years of age, ID proof of the person who will operate the account
be obtained.
In cases where minor can operate the account independently, KYC procedure for
identification/address verification as in the case of any other individuals would apply.

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3. NRIs/PIOs
The original certified copy of Passport and Residence Visa Copies, duly attested by
(i) authorised officials of overseas branches of Scheduled Commercial Banks registered
in India, (ii) Notary Public abroad (iii) Indian Embassy/Consulate General in the country
where the non-resident customers resides (iv) branches of overseas banks with whom
Indian Bank have relationships, (v) Court Magistrate (vi) Judge.

KYC DOCUMENTS - Non-Individuals

1 Proprietary concerns
Proof of the name, address and activity of the concern

Minimum 2 documents issued in the name of Proprietary concern from the following list of
documents along with PAN of the proprietor as a Beneficial Owner, in case PAN not Form 60
shall be submitted
(i) Registration certificate (in the case of a registered concern).
(ii) Certificate/license issued by the Municipal authorities under Shop & Establishment Act.
(iii) Sales and Income Tax Returns
(iv) GST/CST certificate, Certificate/registration document issued by Sales Tax/Service
Tax/Professional Tax authorities as applicable.
(v) License/ certificate of practice issued in the name of proprietary concern by any
professional body incorporate under statute (e.g. Certificate of Practice issued by Institute of
Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company
Secretaries of India, etc.
(vi) IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT in
the name of proprietary concern.
(vii) The complete Income Tax return (not just the acknowledgement) in the name of the sole
proprietor where the firm's income is reflected duly authenticated/ acknowledged by the Income
Tax Authorities.
(viii) Utility bills such as electricity, water, and landline telephone bills in the name of the
proprietary concern.
In cases where the Branches/Business units are satisfied that it is not possible to furnish two such
documents, Branches may, at their discretion, accept only one of those documents as proof of
Business/activity. In such cases, the Branches would, however, have to undertake contact point
verification, collect such information and clarification as would be required to establish the
existence of such firm, confirm, clarify and satisfy themselves that the business activity has been
verified from the address of the proprietary concern
2 Partnership firms

(i) PAN Card of the Partnership Firm (Form 60 cannot be accepted).

(ii) Registration certificate (in case of registered firms)
(iii) Partnership Deed
(iv) Partnership letter
(v) Permanent Account Number or Form 60 issued to the person holding POA on its behalf.
(vi) A Declaration containing the name of all the beneficial owners together with their
shareholding/controlling interest/ stake duly signed by the authorized signatory.
(vii) PAN of all partners & Beneficial Owners.

(Unregistered Partnership firms shall be included under the term ‘unincorporated

association).

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3 Companies

(i) Certificate of incorporation

(ii) Memorandum & Articles of Association
(iii) A resolution from the Board of Directors and power of attorney granted to its
managers, officers or employees to transact on its behalf; and
(iv) PAN or Form 60 issued to Managers, officers or employees holding an attorney to
transact on its behalf
(v) A Declaration containing the names of all the Beneficial Owners together with their
shareholding / controlling interest / stake duly signed by the authorized signatory.
(vi) Certificate of Commencement of Business
(vii) CIN No.
(viii) PAN of Company (Form 60 cannot be accepted)
(ix) Proof of Current Address

PLUS
Proof of identity & address of all the beneficial owners (natural persons if beneficial owners
are non-individuals) (owning 25% share or capital or entitled for 25% profits in case of
company which is not listed in a Stock Exchange (Submission of Proof of identity & address
by beneficial owners of a company listed in stock exchange or is a company majority owned
one by such listed company is not warranted)
4 Limited Liability Partnership
(i) Certificate of incorporation
(ii) LLP Agreement
(iii) PAN of LLP (Form 60 cannot be accepted)
(iv) A resolution from the L L P f o r power granted to its partners, managers, officers or
employees to transact on its behalf; and
(v) An officially valid document in respect of Partners, managers, officers or employees
holding an attorney to transact on its behalf
5 Trusts & foundations

(i) Certificate of registration.

(ii) Trust Deed
(iii) PAN, if PAN is not available, Form 60
(iv) PAN or Form 60 issued to the person holding POA and in case PAN is not submitted an
officially valid document
(v) A declaration containing the name of all the Beneficial Owners together with their
shareholding/ controlling interest/ stake duly signed by the authorized signatory An officially
valid document in respect of the person holding a power of attorney to transact on its behalf
(vi) PAN of Trustees, Executors, Administrators, etc. of all related persons, or beneficial
owners
(unregistered Trusts shall be included under the term ‘unincorporated association).

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6 Society
i) Certificate of registration.
ii) Society Byelaws.
iii) PAN or Form 60
iv) A resolution from the Society and power of attorney granted to its managers, officers
or employees to transact on its behalf; and
v) An officially valid document in respect of managers, officers or employees holding an
attorney to transact on its behalf
vi) PAN of the Chairman/MD/Chief Promoters/Secretary etc. of all Related persona or
Beneficial Owners

7 Accounts of Unincorporated association or body of individuals

(i) Resolution of the managing body of such association or body of individuals.
(ii) Power of attorney granted to him to transact on its behalf.
(iii) PAN or Form 60 issued to the unincorporated association or a body of individuals/person
holding POA on its behalf and in case of PAN is not submitted an officially valid document
Such information as may be required by the bank to collectively establish the legal existence
of such an association or body of individuals.
(iv) PAN of all Related Persons or Beneficial Owners together with their
shareholding/controlling interest/stake duly signed by the Authorised Signatory.
8 Hindu Undivided Family (HUF)
i. PAN or Form 60 of Karta.
ii. PAN or Form 60 of adult coparceners.
iii. PAN Card of Joint Hindu Family, if PAN is not available, Form 60.
iv. Declaration from the Karta.
v. Proof of Identification of Karta.
vi. Prescribed Joint Hindu Family Letter signed by all the adult coparceners.

Central KYC Registry: As per Regulatory guidelines, CKYC is mandatory for Non-
Individual Customer (Legal Entities) w.e.f. 1st April 2021. To comply with the above
guidelines, every Reporting Entity (which includes the Bank) is required to file the electronic
copy of the Customer’s / Entities’ KYC records/data (Customer information, Photograph,
KYC Documents) with the Central KYC Records registry (CKYCR) within 10 days after the
commencement of an account-based relationship with a customer. Account based relationship
includes all types of Loan accounts, non-fund based accounts like Bank Guarantee, Letter of
Credit, etc. (current / cash credit / overdraft accounts / Demand Loan /Term loan account), in
respect of Entity (Non-Personal) opened at Branches or through other channels/platforms.
CKYC Functionality has been rolled out in CBS.

PAN Number of all Borrowers under MSME / C& I is also required to be obtained and
verified with Income Tax Portal. PAN Number of Guarantor / Director / Partner / Proprietor
may also be obtained wherever required and verified with income tax portal for its
genuineness. Wherever proof of address varies from the identification details submitted by
the Borrower / Guarantor / Director / Partner / Proprietor, separate proof of address should be
obtained. Document accepted for proof of identity and address of individual / Non-individual
should be verified through internet on related website wherever such information is available
online to ascertain its genuineness.

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LEGAL ENTITY IDENTIFIER FOR LARGE CORPORATE BORROWERS:”
Legal Entity Identifier (LEI) is a 20-digit unique code that identified every legal entity
(across the globe) or structure that is party to a financial transaction, in any jurisdiction.

- Legal Entity Identifier (LEI) has been introduced as a key measure to improve the
quality and accuracy of financial data systems for better risk management.
- The list of entities eligible to apply for LEI codes are Sole Proprietorships, LLPs,
Partnership Firms, Trusts, Pvt. Ltd. Co. Public Ltd. Co., Govt. Companies, OPC,
Insurance companies, HFCs, NBFCs, Non-profit companies etc.
- Obtention of Legal Entity Identifier (LEI) has been made mandatory by RBI for
the Borrowers having total fund based and non fund-based exposure of Rs. 50 Cr
and above. For exposure above Rs. 5 Cr and upto Rs. 50 Cr, LEI will be
implemented whenever RBI’s instructions are issued.

• The timeline for implementation of the Legal Entity Identifier is as under:

Total Exposure to SCB To be completed by
a. Rs. 1000 Cr. & above March 31, 2018
b. Between Rs. 500 Cr & Rs. 1000 Cr June 30, 2018
c Between Rs. 100 Cr & Rs. 500 Cr March 21, 2019
d. Between Rs. 50 Cr & Rs. 100 Cr June 30, 2019
e. Between Rs. 5 Cr & Rs. 50 Cr timeline will be advised separately

Branches have to input first the LEI Code in LLMS under ‘Incorporation details’ of the
‘Constitution Information Tab’ of the ‘Customer - Module’ and validate it by clicking the
‘Validate’ Button. As LEI Codes obtained are valid only for one year, the same has to be
renewed by the Borrower before they lapse. After the renewal of validity date information of
such LEI Codes are obtained from borrower, the operating functionaries, will have to validate
again through the Validate button.

No-Sanction or renewal of Loan Proposals in LLMS for borrower exposures with Rs. 50 Cr
& above from Banking System is permitted, if valid LEI Code of the entity is not available in
LLMS System, and if the validity date is expiring as on cut-off date of 7 days from the
proposed scheduled Meeting Date of Sanctioning Committee for Loan Sanction or Renewal.

1.2 Preliminary Appraisal and Due Diligence:

Credit Appraisal is a process to estimate and evaluate the risks associated with the extension
of the credit facility. It is generally carried by the financial institutions which are involved in
providing financial funding to its customers. The risk involved here is the non- repayment of
the credit obtained by the customer of a bank. Thus, it is necessary to appraise the credibility
of the customer in order to mitigate the credit risk. Proper credit evaluation of the customer
has to be performed; this measures the financial condition and the ability of the customer to
repay back the loan in future.

When a branch/ AMT/ CPC/ Relationship Manager (RM) receive a loan proposal, it
should be determined if it is prima facie acceptable or not. If the original application
does not contain all the basic data/ information, the branch/ AMT/ CPC/ RM concerned
may interview the applicant(s) to elicit necessary data/information with a view to form an
overall idea about the general feasibility of the project/loan proposal.

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To establish the prima facie acceptability of the proposal, the branch/ AMT/ CPC/ RM
should examine the following aspects in the light of the instructions in force:

* Bank’s lending policy and other relevant guidelines/RBI guidelines:

• Prudential Exposure norms
• Advisories of CRMD in respect of approach towards lending.
• Industry Exposure restrictions
• Group Exposure restrictions
• Industry related risk factors
• Credit risk rating
• Whether the activity being performed by the company is legal and profitable and as
per the stated objective of association/incorporation of the business entity.
• Profile of the promoters/senior management personnel of the project,
• List of defaulters, (RBI list of defaulters/ willful defaulters, CICs)

Due diligence on all Borrowers/ Promoters/ Directors/ Guarantors needs to be carried out
with a view to being satisfied about their credentials, and for ensuring compliance with the
guidelines on KYC and AML under Prevention of Money Laundering Act.

1.2.1 Illustrative list of steps under due diligence of borrower:

i. CICs Defaulters’ List/Wilful Defaulters’ List (suit filed as well as non-suit

filed) as well as verify Credit History by means of Credit History Reports
provided by them.
ii. For all loan accounts o f Rs.5 crores and above (FB and NFB exposure) and
details of all current accounts of Bank’s customers with outstanding balance
(debit or credit) of Rs. 1 crore and above, banks are required to report of account
and account classification including SMAs to Reserve Bank of India through the
reporting system commonly known as CRILC (Central Repository of
Information on Large Credits). These details must be checked at the time of
appraising prospective new connections, as well as at the time of processing
renewal/ enhancement proposals in respect of existing borrowers by undertaking
a search in CRILC database.
iii. Employees PF Organisation Site for defaulting companies/units. The Provident
Fund contribution deducted from the employees of an establishment/ firm during
a particular month are normally remitted to the Employees Provident Fund
Organisation (EPFO) by the 15th of the following month by the company/firm
concerned. In view of increasing high value frauds in advances, operating
functionaries also peruse the Employees Provident Fund Organisation (EPFO)
web site for ascertaining the commitment of promoters of the unit towards timely
remittance of Provident Fund (PF) contribution deducted from the salaries of
their employees to the EPFO, as this will provide an indication of the health of
the establishment/firm.
iv. ECGC caution list/ Specific Approval List etc.
v. Banned List of Promoters of SEBI.
vi. Loan Rejections/ CRA Slippages in CPPD site
vii. List of Disqualified Directors available on the website of Ministry of Corporate
Affairs (MCA) i.e. http://www.mca.gov.in.
viii. SBI Default Borrower Registry (SBIDBR):- To align with the emerging best
practices of data privacy and with a view to leverage the modern digital platform,

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 Bank has developed a web based application “SBI Default Borrower Registry
(SBIDBR)” accessible through URL https://sbidbr.sbi:9443.
- Search through SBIDBR can be carried out for all loan applications, however
search will be mandatory for ₹10 lac and above loan applications irrespective of
segment.
- Search through SBIDBR is an additional risk mitigation measure that will
complement the pre sanction activities now being carried out and is not intended
to replace, fully or partially, any of the extant procedures / steps prescribed by the
Bank in this regard.
- SBIDBR search facility should also be used by the branches while issuing “No
Dues Certificate” to any current account holder / customers and such certificate
should be issued only after ensuring that the person, in whose favour the NOC is
being issued, is not linked to any loan in any branch of the Bank.
ix. List of Non-Cooperative borrowers (where aggregate FB and NFB facilities of
Rs. 5 crores and above).
x. IBG defaulters list.
xi. Audited financials submitted by the unit should be independently verified as
under:
a) For Corporate Borrowers, independent verification with website of MCA
shall be done.
b) For Non-Corporate borrowers with respective Statutory Auditor/Chartered
Accountant.
c) Turnover of the Units as mentioned in the audited balance sheet need to be
verified with GST returns and Income Tax returns of the customer for the
respective financial year. The audited financial statements submitted by
the Borrower to be compared with GSTR-9 & GSTR-9A, which are the
Annual Returns, for validating Sales/Purchases data.
d) Moreover, along with the audited balance sheet, the borrowing Units need to
submit usual KYC documents in respect of the auditor firm viz. copy of
address proof and identity proof like PAN card, Driving licence, Aadhar
Card etc. or alternatively, a copy of GSTN Invoice, issued by the Auditor
which he would have submitted for payment of the bills to the customer. This
will ensure genuineness of the Auditor.
xii. Reasons for change in the accounting year as well as in auditors, if any, should
be ascertained.
xiii. ROC Search
xiv. Credit information reports from the existing bankers in IBA format on the
applicant Company/group companies. In respect of Group Companies, the
following to be ensured:
a. CIR(s) shall be mandatory for all Group concern(s) having borrowing
arrangements from Banks/ FIs and having ECR of below BBB or are unrated
b. CIR(s) shall also be mandatory for all Group Concern(s) whose names appear
in any of the defaulters/ SMA/ Caution/ RBI Fraud Registry/ Red Flagged
Accounts/ CRILC list.
c. Group concerns having borrowing arrangements with Banks/FIs outside India
and have ECR below investment grade or are unrated.
d. For others, CGM (CAG/CCG/PFSBU/IBG) may permit waiver.
e. In cases where Obtention of CIR is waived, CIR may be compiled by the
Credit Analyst on the basis of information sourced from CRILC/MCA/
CIBIL/Other public forums.

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xv. In case of prospective new connections:
- Scrutiny of bank account statements, covering loan accounts and current
accounts. For the purpose, transactions over a period of one year should be
reckoned.
- Obtention of declaration, duly certified by a Chartered Accountant, that (a) there
are no other credit facilities in any Bank/FI/NBFC which is irregular, and that (b)
there are no overdue statutory payment obligations.
- Obtention of declaration regarding credit facilities availed by its Associates and
Subsidiaries from the banking system, confirming also that there are no irregular
features in conduct of their account(s).
- Verification of credentials of all groups / connected companies as well as joint
ventures from various sources.
- Financial support for setting up of new ventures or expansion of existing
ventures should not be extended in case the concerned unit belongs to a group
which comes under either of the following categories:
a. Any company within the group has been declared as Wilful Defaulter.
b. Any company in the group is not co-operating with the Bank in
finalising settlement of the Bank’s dues.

- In case of split in a group, the splinter groups will be regarded as separate

groups.
xvi. Prescreening of prospective new connections by making a reference to the
borrower profiling reports from M/s Cubictree Technology Solutions Pvt. Ltd
(CTSPL) has been made mandatory in the Bank, in all cases where our estimated
exposure is Rs.5 crore and above (aggregate of fund based and non-fund based
exposures).
xvii. Market reputation report from agencies like Cogencis.

xviii. Central Fraud Registry of RBI.

xix. Acceptability of the promoters and t h e i r ability to bring margin/promoter’s
stake.
xx. Compliance regarding transfer of borrower accounts from one bank to another, if
applicable.
xxi. Government regulations/legislation impacting on the industry, e.g., ban on
financing of industries producing/consuming Ozone depleting substances.
xxii. Applicant’s status vis-à-vis other units in the industry,
xxiii. Financial status in broad terms and whether it is acceptable.
xxiv. Scrutinise carefully the borrowers Memorandum and Articles of Association /
Partnership Deed / Trust Deed / Society Byelaws / etc. to (i) ensure that there are
no clauses prejudicial to the Bank’s interests, (ii) ascertain whether any
limitations have been placed on the Company’s borrowing powers and operations
and (iii) the scope of activity of the company.
xxv. For Project Finance/Term Loan, branches should additionally examine the
following:
- 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, are correct.
etc. are correct

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In view of increasing high value frauds in advances, in respect of purchase of Plant and
Machinery out of Term Loan (TL) proceeds following instructions should be followed:

• Opinion reports on suppliers should be invariably obtained/ compiled for at least

75% of the cost of the proposed equipments being procured under Bank’s finance.
• The plant and machineries to be purchased out of Bank’s loan are procured directly
from the manufacturer/authorized dealer instead of intermediaries.
• Borrowers have to submit quotations from the manufacturer/ authorized dealer, at the
time of request for sanction of Term Loan, which should contain the details of RTGS
Code and Account Number to which the TL proceeds have to be remitted.
• Due diligence on the account of the manufacturer/authorized dealer (supplier) should
also be carried out to minimize the chances of misutilization / diversion of
Bank’s funds.

xxvi. After undertaking the above preliminary examination of the proposal, the branch
will arrive at a decision as to whether to support the request or not. If the branch
finds the proposal acceptable, it will call from the applicant(s), a fully
comprehensive application in the prescribed proforma, along with a copy of the
proposal/project report, covering specific credit requirement of the company and
other essential data/information. The information, among other things, should
include:
a. Organisational set up with a list of members of Board of Directors and
indicating the qualifications, experience and competence of the key
personnel in charge of the main functional areas e.g., purchase, production
marketing and finance.
b. Demand and supply projections based on the overall market prospects
together with a copy of the market survey report. The report may comment
on the geographic spread of the market where the unit proposes to operate,
demand and supply gap, the competitors’ share, competitive advantage of the
applicant, proposed marketing arrangement, etc.
c. Current practices for the particular product/service especially relating to
terms of credit sales, probability of bad debts, etc.
d. estimates of sales, cost of production and profitability.
e. Projected profit and loss account and balance sheet for the operating years
during the currency of the Bank assistance.
f. If request includes project financing, branch should obtain additionally
(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, wherever necessary.
g. No objection certificate from the existing lenders, if any, for ceding
pari-passu charge, should be stipulated as a pre-disbursement condition.
h. Time to obtain NOC from existing lenders and to create pari-passu charge
should be considered by the sanctioning authority in respect of existing connections
on a case-to-case basis.
Borrower may engage services of Chartered Accountants/Cost Accountants/Financial
Consultants/Merchant Bankers etc. for preparation of financial statements, CMA data
etc. for submission to the Bank for availing loan facilities. Operating units are
required to obtain the mandate, duly filled in and signed, along with the application
form and other requisite details at the time of pre-sanction/appraisal/engagement of

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 intermediaries by borrowers. Wherever intermediaries/ merchant Bankers have been
engaged, presence of Promotor or their authorized representative shall be mandatory
in all critical discussions like quantum of loan, pricing, covenants, terms and
conditions etc.

xxvii. In addition to the above, particulars regarding the history of the concern, its past
performance, present financial position, etc. should also be called for. This data/
information should be supplemented by the supporting statements such as:
a) Audited profit loss account and balance sheet for the past three years. The
audited financials should generally be not more than 12 months old.
b) For non-corporate borrowers, irrespective of market segment, having exposure
of Rs. 50 lacs and above from the banking system, audited balance sheet in
the IBA approved formats should be submitted by the borrowers.
c) The financial statements being submitted by the borrower should invariably be
verified with the statements filed with Registrar of Companies
(ROC)/respective Statutory Auditor/Chartered Accountant at the time of
sanction/review/renewal of the limits from the website of Ministry of
Corporate Affairs i.e. www.mca.gov.in.
d) Details of existing borrowing arrangements, if any,

xxviii. Financial Due diligence (Both for existing and new connections)
a) The financials of the main company and its major associate/sister
concerns should be reviewed, as far as possible, on the basis of audited
financials of the concerns on a common date.
b) Balance Sheet should be free from any material adverse remarks of
the auditors. Any adverse comments must be separately discussed in the
evaluation/appraisal process.
c) Verification of Income Tax, G S T r e t u r n , etc. (for the years as
applicable) must also be ensured.
d) Authenticity of the documents / reports/ certificates etc. issued by
Chartered Accounts is to be verified from the link https://udin/icai.org
with UDIN and key field provided by the certifying Chartered
Accountants. (The Institute of Chartered Accountants of India (ICAI)
has implemented the system of Unique Document Identification
Number (UDIN) to secure the certificates/documents attested/ certified
by practicing Chartered Accountants. This measure help in detecting
forged documents and misrepresentations, as only Chartered
Accountants are authorized to generate UDIN). The facility of UDIN is
to be utilized as part of due diligence.
e) Frequent c h a n g e s in management structure.
f) Searches in the books of the ROC with regard to charges created
and satisfied on the assets of the unit, change in directors, capital
structure and major shareholders etc. along with verification of
audited financial statements should be carried out.
g) Searches in the books of the Sub-Registrar of Assurances should be
carried out.

An indicative list of the important items in Profit and Loss Account and Balance Sheet which
are to be verified/cross checked with the statutory returns mentioned there against are
mentioned below: -

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S. No. Item in P&L Account/ Returns filed by the unit, with which the figures have
Balance Sheet to be cross checked
i. Capital Balance Sheet available with Registrar of Companies
(ROC).
ii. Increase in Authorised e form SH-7 (Return as per Companies Act, 2013).
Capital
iii. Allotment of shares e form PAS-3 (Return as per Companies Act, 2013).
iv. Domestic Sales VAT/GST return. (for the years as applicable)
v. Export Sales G R Form/Softex Declaration Form (SDF).
vi. Purchases Credit claimed in the GST/VAT returns.
vii. Receivables As detailed in Circular No. CCO/CPPD- ADV/59 /2013 -
14 dated 28/08/2013.
viii. Quantitative details of Raw Tax Audit Report 3CA (Auditor’s certification of
Materials/Finished Goods/ Bye 3CD)/3CD.
products/Goods traded.
ix. Salary and wages expenses Quarterly statement of TDS on Salary (Form
No.24Q) filed with IT Department.
b) PF/ESI/Professional Tax Registers/Returns
x. Interest payment to outside Quarterly statement of TDS (Form No.26Q) filed with
borrowings IT Department, under Section 194-A – tax deducted at
source from interest other than interest on securities
xi. Payment to Contractors Quarterly statement of TDS other than Salary filed under
Section 194-C (Form No.26Q) with IT Department.
xii. Net Profit Income tax return and other related documents submitted
to IT Authorities.
xiii. Income received by a service ST-3/GST return filed with Service Tax authorities.
provider (services industry)

xxix. Concurrent b o r r o w i n g : Before sanctioning any c r e d i t l i m i t , t h e

B r a n c h should ensure that the applicant is not enjoying similar or ANY other
credit facilities with other banks. Normally, multiple borrowing/multiple
facilities to the same borrower from two or more banks should not be allowed. If
the applicant is found having any credit facility from any other bank or
financial institution, detailed information should be called from the concerned
bank/FI. The applicant should submit along with the loan application a
declaration regarding the existing credit arrangements and an undertaking that
stocks financed by us will not be hypothecated to any other bank without prior
approval of the Bank. Such multiple borrowings by persons / firms, without the
Bank’s written consent, should be viewed as financial indiscipline. The
advances will be recalled immediately in case it was subsequently found that
the borrower had made a false statement in this regard. As far as possible, parties
should be advised to restrict their borrowings to one bank only.

xxx. Applicants seeking credit facilities of Rs.25 lacs and over, should furnish in the
loan application information about all pending litigations, which have been
initiated by another financier including banks against applicants, their partners,
directors, etc. for recovery of dues. Similarly, in the loan proposals this

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 information should also be furnished in the appraisal submitted for sanction of
credit limits of Rs.25 lacs and above under other details, along with information
on RBI defaulters list/ECGC caution list.

Third Party Entities (TPEs): Bank relies on reports or certificates of a number of

professionals for due diligence or appraisal. These professionals referred to Third Party
Entities (TPEs) include Chartered Accountants, Lawyers and Valuers etc. Bank has recently
developed on-line Vendor Management System (VMS), outside CBS, containing master
database, centralized monitoring, allotment of work and tracking the performance for
evaluation of their services and renewal of contract of TPEs which includes Chartered
Accountants, Advocates/ Law Firms, Valuers, Investigating Agencies/ Agencies for
Specialised Monitoring (ASM)/ Resolution Professional (RP) and Debt Resolution/
Recovery Agents.

While the above list is illustrative, the operating officials must undertake the due diligence
exercise as warranted and considered relevant, ensuring to guard against entry of marginal
assets on to our books.

End to End Credit Process (ETECP): Documentation of Steps Taken to Verify

Authenticity and Reasonableness of Performance Figures and Estimates/Projections

A structured system i s p u t i n p l a c e for documentation of steps taken to verify

authenticity of performance figures as well as reasonableness of estimates and projections
submitted by borrowers/prospective borrowers. The dispensation will be applicable for
exposures (FB+NFB) above Rs.5 crores. The Officials who are responsible for appraisal
and assessment shall be responsible for carrying out the measures/steps.

For this purpose, a checklist for recording steps taken for validation of performance figures
as well as estimates and projections are as under:

CHECKLIST
1. New Connection:
Sl. Papers/Information Steps taken for verifying the Yes/ No
No. submitted by authenticity/reasonableness
Borrower/Prospecti
ve Borrowers to
be validated
1. Audited Financial Confirm that complete sets of audited financial
Statements for last 3 statements are received along with all schedules,
years auditor’s notes, directors’ notes and properly recorded.
Whether the Financial Statements received are
original, with original signature of the auditors. If not,
whether photocopies are attested by the authorized
signatories of the company.
Whether a confirmation from the auditors’ firm has
been obtained to the effect that they have audited and
signed the financials of the company.

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 Whether photocopies of the Financial Statements have
been compared with the original statements with the
company.
Copies filed with ROC obtained from ROC site and
compared.
Whether the production/sales figures have been
cross checked on the basis of the installed capacity,
current capacity utilization of the unit.
Whether the production figures have been cross-
checked with the electricity consumption of the unit.
2. Copies of the last Whether copies are duly attested by the authorized
Sales Tax signatories of the company.
Assessment Order,
Whether the documents have been verified with
Export-Import Code
the original documents
etc.
Whether the figures (production/sales) cross checked
with the GST/Sales Tax Assessment Orders, Excise
Records etc.
3. Estimates/ Projected Whether the estimated/projected figures are as per past
Figures trend in terms of no. of units and price.
If not as per past trend, the matter has been discussed
with the promoters and reasons ascertained for the
higher/lower growth estimated/projected.
Whether growth estimated/projected by the company is
in tune with the industry scenario, Govt. Policy,
outlook for the future etc.
Whether details of Order in hand, names of major
customers, terms & conditions, names of suppliers &
their terms and conditions, production process and
working cycle of the unit has been studied and
discussed with the promoters.
Whether Estimates/Projections are in tune with
other factors like Production capacity and level of
capacity utilization
If a sizeable spurt in production/sales is estimated/
projected, whether factors like adequate power supply,
provision of required space etc. are in place.

2. Existing Units (Renewal of Existing WC limits):

Full set of latest Audited Financial Statements, along with all schedules, auditor’s
notes, directors’ notes received in original with signature of the auditors or duly
signed by authorized signatories have been received.
Whether the Audited Financials submitted by the company has been verified with
the copy filed with ROC.
CMA submitted by the company duly signed by authorized signatory(ies) with
validation of sales and justification for holding levels.

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 Whether estimates/projections are in line with historical trends. If there is unusual
spurt, whether the facts justifying the fact like abnormal orders in hand,
implementation of expansion project etc. are discussed and properly recorded.
Estimated/projected holding level are based on the average peak level
holdings for last 12 months and as per the historic trend as on the Balance Sheet
dates for last few years.
If holding levels are varying from the past trend, then appropriate comments for the
same are furnished.
Sundry Creditors level is in line with the past trend. If not, specific reasons are
given.
If NFBL is proposed, the sundry creditors level is in line with the usance period
(LC) proposed and other current liabilities are in line with the extent of advance
payment made through BGs proposed.
While calculating the requirement of import LC limit, the value of monthly
raw material purchased is net of duty, insurance and fr e ig ht , whic h
has bee n imported.
If Buildup of Current Assets is higher than the growth in sales, then whether valid
justification is furnished and recorded supported by documents.
If projected profitability is not in tune with past performance or that of peers in the
industry, whether reasons are inquired into and proper justification and comments
are recorded supported by documents.

3. In case of Term Loans (Both New and Existing Units)

Whether Project Cost vetted by Bank’s empanelled valuer.
In case of new venture, whether TEV study has been done by Bank’s empanelled
consultant/consultancy cell.
Whether estimates are based on quotations/ price list submitted.
Whether opinion on suppliers is received and verified.
Whether Capacity has been verified based on the quotation
Whether adequate space is available for the proposed expansion/modernization.
Whether all factors like Power supply, water and other infrastructural facilities
are in place.
Whether sources of margin proposed to be brought in have been clearly stated
and evidenced.
Whether Proofs of expenditure already incurred in the project submitted and
verified from original copies.
In case of expansion programme, reason/ justification for the same have
been discussed with promoters.
Whether copy of industry license mentioning the installed capacity has been
submitted and verified from the original.
Whether copies of all other approvals/ permissions from various authorities
submitted and verified from original.
Whether study on marketing of products has been done and proper tie up with
major customers has been entered into.
Whether the estimated/ projected figures are as per past trend in terms of no. of
units and price

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 If not as per past trend, the matter has been discussed with the promoters and
reasons ascertained for the higher/lower growth estimated/ projected.
Whether growth estimated/projected by the company is in tune with the industry
scenario, Govt. Policy, outlook for the future etc.
Whether details of Order in hand, names of major customers, terms &
conditions, names of suppliers & their terms and conditions, production process
and working cycle of the unit has been studied and discussed with the promoters.
Whether Estimates/Projections are in tune with other factors like Production
capacity and level of capacity utilization.
If a sizeable spurt in production/sales is estimated/ projected, whether factors like
adequate power supply, provision of required space etc. in place.
Full set of latest Audited Financial Statements, along with all schedules, auditor’s
notes, directors’ notes received in original, signature of the auditors or duly
signed by authorized signatories have been received.
Whether the Audited Financials submitted by the company has been verified with
the copy filed with ROC.
CMA submitted by the company duly signed by the authorized signatory (ies)
with validation of sales and justification for holding levels.
Whether estimates/projections are in line with historical trend. If there is unusual
spurt, whether the facts justifying the fact like abnormal orders in hand,
implementation of expansion project etc. are discussed and properly recorded.
If projected profitability is not in line with past performance or that of peers in the
industry, whether reasons are inquired into and proper justification and comments
are recorded supported by documents.

1.2.2 Credit Information Company’s (CIC) reports:

Bureau reports from CICs play a key role in sanctioning of loans. Commercial report
consists of the details of the borrower’s Total Liability, Credit History, Asset Classification
etc. across all Banks/NBFCs/MFIs.

i. As per Credit Information Companies (Regulation) Act 2005, collection of

information on borrowers of all Banks and Financial Institutions and its dissemination
in the form of Credit Information Reports is being done by four Credit Information
Companies (CICs) registered with RBI. The four CICs are:

a. TransUnion CIBIL Limited (TCL)

b. Equifax Credit Information Services Private Limited (ECISPL)
c. CRIF High Mark Credit Information Services Private Limited (CHMISPL)
d. Experian Credit Information Company of India Private Limited (ECICIPL)

ii. CICs are providing Consumer Report for individuals and Commercial Reports for
Non-Individual entities. Whereas TCL, ECICIPL, and CHMISPL are offering CIRs
under Consumer and Commercial, ECISPL is offering only Consumer related CIRs
and not Commercial CIRs. CIBIL and CRIF High Mark have been identified as
preferred CICs for obtaining report for proposal pertaining to MSME / C&I segment.
In our Bank, we have to obtain either one or two CICs from these agencies on the
basis of following parameters:

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 Type of Advances Report from one CIC Report from two CICs
Unsecured Loan Limit upto Rs.2 lacs Limit > Rs.2 lacs
Secured Loan * Limit upto Rs.10 lacs Limit > Rs.10 lacs
(* Not applicable for Loans against Specified Securities)

iii. While sanctioning/ renewing loans to a borrowal unit, any default of a Proprietor/
Partner/ Director (excluding Nominee/ Professional/ Honorary directors)/ Guarantor,
in payment of dues, though in his personal/ individual capacity, cannot be ignored
altogether. In order to have a uniform approach across all Business Verticals and to
facilitate better customer service by improving TAT, Bank has put in place authority
structure to approve acceptability of the proposals involving disputed defaults
appearing in the Credit Information Reports of Proprietors/ Partners/ Directors
(excluding Nominee/ Professional/ Honorary directors)/ Guarantors, on account of
loans/ credit card payments, in their personal/ individual capacities:

iv. As per our loan policy, no fresh limit/ enhancement may be sanctioned to
units/promoters whose name appear in the 'Willful defaulters' list. However, with the
approval of appropriate authority, renewal/ continuation of earlier sanctioned limits
may be approved.

1.2.3 Due diligence on guarantors:

With a view to streamlining procedures, and bringing in uniformity of approach, guidelines
have been laid down for ensuring proper scrutiny / due diligence in respect of Guarantors
(individual as guarantor, corporate entity as guarantor, NRI/PIO or OCI (overseas citizen of
India) as guarantor, non-individual overseas entity as guarantor & third party guarantors.

i. Individual as Guarantor:
Apart from obtaining proof of identification and address as per KYC norms, the
details of income, assets, liabilities, etc. is also required to be obtained as per
following indicative list:
a. Bank Account Statement – last 6 months
b. Credit Card Statement -- not more than 3 months old
c. Salary Slip (Recent date)
d. Income Tax Return
e. Income/Wealth Tax Assessment Order
f. Details of movable and immovable properties
g. Details of liabilities with its terms and conditions

In case of Non-Resident Indian (NRI) or Person of Indian Origin (PIO) or Overseas Citizen
of India (OCI) as guarantor, following due diligence must be done:

a. Passport and Residence Visa Copies

b. Copy of PIO/OCI Card issued by Govt. of India.
c. Copy of relevant pages o f passpo r t of par ent s or grandparent s, establishing
them as NRI/ being of Indian origin.
d. Copy of marriage certificate establishing the spouse as NRI/ being of Indian
origin.
e. Where face to face interaction is not possible with the guarantor, branches must
insist on certification of documents for photo ID and proof of residence by any one
of the following:

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 i) Banker (our branches/Offices overseas)
ii) Notary Public
iii) Indian Embassy
f. Further, branches may also accept verification of documents by officers of
correspondent banks whose signatures are verifiable through an authorised (A/B
category Forex handling branch) branch of the Bank.

Before accepting Third Party Guarantees, branches are advised to exercise more than
ordinary care in view of our experience that several frauds that have been detected are found
to be having links to fake title deeds of property purportedly belonging to third party
guarantors. Some of such Third-Party Guarantors have no connection whatsoever with the
borrowing entity / promoters and have merely offered their guarantee / fraudulent title for
consideration.
Where the third-party guarantor –individual or non-individual - offers charge on property
standing in their name as collateral, carrying out of Search, Title Investigation and
Valuation, just as applicable to property of promoters and promoter directors, must be
ensured by operating units.

- A photograph of guarantor should be pasted on the relevant guarantee agreement.

- If the individual furnishing the guarantee is not already covered in course of search /
due diligence carried out for the borrowing entity, separate search for the guaranteeing
individual in RBI Defaulters’ List / ECGC Caution List / Credit Information Company etc.
is to be ensured.
- Separate CIF is to be created for guarantors and linkage to Borrower CIF in CBS is to
be ensured.
- In cases where mortgage of property is created/ extended at the time of initial grant of
facilities and/or at the time of enhancement of limits, “Income Tax Act– Guidelines for
obtaining Prior Permission under Section 281 to create a charge on the assets of Business”
are to be complied with.

ii. Corporate as Guarantor:

a. Memorandum and Articles of Association (MAA). MAA is to be examined to
ascertain whether the company is authorised to provide guarantee. As per the Indian
Companies Act, 2013, making the requirement of having Common seal optional to
the individual companies. (i) In case a company opts to have a Common Seal:-
Branches should continue to get the Common seal affixed on all documents. (ii) In
case a company opts not to have a Common seal:- The company should be advised to
amend its Memorandum and Articles of Association to do away with the common
seal and the requirement of affixing of common seal and also indicate its option i.e.,
execution of documents either by two directors or by a director and the Company
Secretary. Thereafter, the documents may be allowed to be authenticated as per the
option exercised by the company. Branches should not insist upon affixing of
common seal in such cases.
b. Certificate of Incorporation
c. Certificate of commencement of business
d. CIN Number
e. Copy of PAN of Company
f. Proof of Current Address
g. The guarantee should be executed by the director or some other officer of the
company duly authorised to do so by a resolution passed by the Board of Directors of

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 the company.
h. Photograph and identity documents of the functionary so authorised.
i. PAN / DIN of all Directors.
j. If the guaranteeing corporate has borrowing arrangements, “No
Objection” certificate(s) from the lending banks.
k. Search, as is carried out in RBI Defaulters’ List / ECGC Caution List / MCA Site/
Credit Information Company etc. for a borrowing entity and its Promoters /
Directors is to be ensured, mutatis mutandis.
l. The provision of the Companies Act, 2013 regarding providing guarantee or security
by companies should be considered before accepting the guarantee and to be ensured
that the same is valid and enforceable under law.
m. The restrictions imposed u/s 185 of the Companies Act for the companies to issue
guarantee or provide security should be considered before accepting the guarantee, to
ensure that the same is valid and enforceable under law. If the issuance of such
guarantee is not precluded under Section 185 of the Act in a given case, it should be
ensured that the guarantee does not exceed the limit prescribed u/s 186(2) of the
Companies Act, 2013.
.
n. All foreign entities are governed by the laws of their respective countries. As
such, constitutional documents for such entities may differ from country to country.
In such instances, D&B report on the entity is to be obtained. Further, in case of
complexities, legal opinion on individual cases is to be sought – covering,
inter alia, opinion on constitution of the entity, its powers and authority in law to
stand guarantee, to what extent jurisdiction of Indian Courts may hold and related
other issues.

Note: In case NRI/PIO/OCI/Non-Individual foreign entity stands guarantor to an

advance, the following clause is to be incorporated in the Guarantee Agreement,

“Courts in India will have exclusive jurisdiction to t ry suit or any other claim
arising out of this guarantee.”

iii. The legal standing as well as precautions to be taken before accepting

guarantee of the following category of guarantors is furnished below:

a. Proprietorship Firm: In a proprietorship, one person / individual conducts the

business in the trade name and owns all the assets of the business. A sole
proprietorship is not a separate and independent legal entity. The proprietor and the
proprietorship business are a single entity in the eye of law. As such, the
individual who is the proprietor may execute the guarantee for a loan sanctioned by
the Bank to any person or entity in his separate / individual name.
b. Partnership Firm: A partnership does not have a separate legal existence
distinct from its partners. Hence, all the partners, or one or more partners of the
firm may, with the specific and definite authority of the remaining partners, execute
a guarantee agreement in the name of the firm. The partnership deed is to be
perused/ examined to ascertain the authority of the partners to execute the guarantee.
In the case of death, insolvency or retirement of a partner or admission of a new
partner to the firm, to prevent the operation of Clayton’s Rule, the liability of the
partners should be determined, and a fresh guarantee should be obtained from the
re-constituted firm, with the approval of the competent authority.

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 c. Limited Liability Partnership (LLP) Firm: A LLP is a body corporate formed
and registered under LLP Act, 2008, and is a separate legal entity distinct from
its partners. Therefore, a LLP may provide guarantee for the loan granted by the
Bank to a person/ entity. The incorporation document/LLP agreement is to be
examined to verify that the execution of the guarantee is authorised and in
accordance therewith. The designated partners/other partners empowered/authorised
in the LLP Agreement may execute the guarantee. The LLP shall pass a Resolution
for the execution of the Guarantee as may be provided in the LLP Agreement. A
copy of the Resolution is to be obtained and kept on record as part of security
documents.
d. Hindu Undivided Family (HUF): Members of a joint Hindu family constitute the
HUF. Debt can be contracted on behalf of the HUF for the purpose of family
business, and the properties of HUF can be charged only for the beneficial
interest/ necessity of the family. A guarantee executed on behalf of the HUF can be
challenged on the ground that it is not for the beneficial interest of the family.
Therefore, it is not advisable to obtain the guarantee of HUF for a loan granted to
third party. However, individual members of the HUF may execute guarantees in
their personal capacity, which will bind them in their respective individual
capacities.
e. Trust: Public Trusts are u s u a l l y c o n s t i t u t e d f o r s o c i a l a n d charitable
purposes, and Trust property cannot be used for the private advantage of individuals/
trustees or for a purpose in which trustees have personal interest. Hence, it is
generally not advisable to obtain the guarantee of a public trust for any loan granted
to a person/ entity. In a specific case where the guarantee of a trust is sought to be
provided, the purpose of the loan and the trust deed should be examined, and legal
opinion should be obtained for considering such proposal.
f. Society: A Society registered under the Societies Registration Act is a separate
entity capable of entering into agreements and contracts. However, as a Society is
normally constituted for welfare activities, the bye laws of the Society and purpose
of the loan should be examined before considering the proposal for guarantee of a
Society. Specific legal opinion should be obtained on a case-to-case basis where a
Trust or a Society proposes to provide a guarantee for an advance.
g. Associations/ Clubs: If the Association or Club is not registered under the
Societies Registration Act or any other law, it will be treated as un- incorporated
body. Hence, it is not advisable to obtain guarantee from such un-incorporated
bodies as the individual members of such institutions cannot be made liable in their
personal capacity.

1.2.4 Compilation of Opinion Reports on Borrower/ Guarantor:

i. Opinion Reports should invariably be compiled and updated annually for borrowers
in CAG, CCG, R&DBG and before migration of accounts to SARG.
ii. Compilation of detailed opinion report has been exempted in following cases:
- On constituents with personal overdrafts against government securities, company
debentures or shares, units of mutual funds, life insurance policies, loans against
Bank’s own fixed deposits etc.
- Borrowers availing loans against pledge of Gold, Auto Loans upto Rs. 20 lacs,
Xpress Credit, Pension Loans, Education Loans upto Rs. 7.5 lacs
- Borrowers availing loans upto Rs.3.00 Lacs in case of AGL and SME
segments.
- On petty co-obligants to bills whose liabilities to the Bank do not exceed Rs.

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 2,500 or, such other figure as the Bank may decide.
- On co-obligants to usance bills discounted.
- In cases where the Bank so advise, on borrowers against pledge of produce
for small amounts not aggregating Rs. 5,000 per party
iii. Form of Opinion Report: Opinion reports are divided into two parts viz. i) loans
upto Rs.25 lacs ii) loans above Rs.25 lacs. It consists of basic information on the
borrowers/ guarantors, description and value of immovable property (ies), other
assets – (movable) including cars etc., liabilities, self- certification of
borrower/guarantor, etc. It also consists of information on the proprietor/ partner/
Director/ Guarantor of the firm/ company with their PAN/ DIN/ TAN numbers.
Details of family members also required to be provided in the opinion report. This
report also provides the information on immovable properties (specifying share of
applicant in case of joint property & details of owners), Movable Assets, borrowings
other than discussed under Immovable/ Movable tables, details of guarantees given
to cover liabilities of others, Means (Tangible Net Worth) of the firm/company
which is offering guarantee/ corporate guarantee. It also includes the estimate of
the Branch Manager/ Manager of the Division/Relationship Manager/ Unit Head
about the total Net Worth of borrower and guarantor. Bank’s official is also
supposed to write his name, PF number and put his signature with date.
iv. Periodic revision of opinions: In respect of a firm dissolved and subsequently
reconstituted, or constituents whose position has suffered deterioration, opinions
should be revised as soon as the facts are known. All other opinions should be
revised at least once a year. Wherever the position of the proprietors/ partners also
undergoes substantial changes, a fresh opinion report is to be compiled. Each opinion
should be signed by the Branch Manager and Relationship Manager/ Credit Support
Officer and where the revision discloses no alteration in the borrowers’ position the
words ‘No Change’ should be entered, dated and signed.
v. Periodic verification of the government gazette: In order to ensure that the
position of parties under liability to the Bank is not adversely affected without the
Bank’s knowledge, in addition to the precautions related above, the local
Government gazette must be regularly perused for notices of insolvency, changes in
the constitution of partnership firms, etc.
vi. Opinions to constituents and others: Opinions on local parties who are not
constituents of the Bank should not be furnished to other banks established locally.
a. As a rule, opinions should be given orally except to banks, Central and State
Governments and government sponsored institutions and to parties approved by the
Controlling Authority for this purpose. In this connection, when a Branch Manager
is asked by Government or by the local Chamber of Commerce or other public
body for a report or opinion on any matter of public importance or any subject
affecting the Bank, he should submit a draft of his proposed reply, with connected
papers, to his controlling authority for approval. Parties who are not constituents of
the Bank should be directed to make their enquiries through their bankers.
b. The estimated means, details of the property, etc. of the party reported on, should
not be stated in absolute term. For this purpose, the following code should be
adopted by the branches / operating units / processing cells.
When a party’s means are estimated at He should be reported as having
Upto Rs.1.00 lac Very small means
Above Rs.1.00 lac to Rs.4.00 lacs Small means
Above Rs.4.00 lacs to Rs.10.00 lacs Moderate means
Above Rs.10.00 lacs to Rs.25.00 lacs Fair means

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Above Rs.25.00 lacs to Rs.1.00 crore Good means
Above Rs.1.00 crore to Rs.10.00 crores. Very good means
Above Rs.10.00 crore to Rs.25.00 crores Large means
Above Rs.25.00 crores Very large means
c. The abovementioned “Rating” is to be recorded in the Opinion Reports under the
Column “We estimate the net means (including/excluding investment in Borrowing
Company) of Shri./Smt. ------ at Rs.------- and therefore his/her rating is --------.
d. For sharing of information amongst Banks on Net Means, credit worthiness and asset
classification of any Borrower/Firm/Company, the Credit Information Report (CIR)
format which is designed by Indian Banks’ Association (IBA) should be used
invariably. It is further clarified that the Net Means of proprietor /firm /company
should be shared by way of rating (excluding investment in Borrowing Company)
only and not disclosed in absolute terms.
e. Branches / operating units / processing cells should ensure that the reports issued by
them about their customers to other banks depict true state of affairs. Statements that
are likely to mislead the other banks should be avoided.
f. Credit information on the borrowers is customarily shared by banks on a specific
request received from another bank. Branches / operating units / processing
cells should use the format prescribed by the Indian Banks’ Association (IBA) for
sharing credit information with other banks. The report should not be signed but
forwarded under cover of a letter and acknowledgement sought. Credit information
received from other banks should be acknowledged.
vii. Confidentiality of information regarding defaulting borrowers: Branches/
operating units / processing cells should ensure that such information is treated as
“Strictly Private & Confidential” and that under no circumstances the
information should be shared, and the source disclosed to outsiders. Any further
enquiries in this regard should be made with the reporting Banks/FIs and not with the
defaulters or any other persons.
viii. Obtaining Separate Assets & Liabilities Statement: For all loans above Rs.25 lacs
, branches / operating units / processing cells should obtain statement of assets and
liabilities with following documents:
- Copies of Documentary evidence in respect of assets of Borrowers/ Guarantors
- Copy of IT return filed along with a copy of latest available IT assessment order
- Self-Certification will be the basis for the Opinion Report (if not an IT assesses)
- Bank account statement with all the Banks for the past one year to be obtained.
- Other assets to include cars, jet, yachts etc.
- Detail term and conditions of liabilities reported including sanction letter, if any.
ix. The statement of assets and liabilities is required to be obtained in the form of
notarised affidavit in case of the following types of loans:
New loans For all loans rated (SB-9) and worse.
Existing loans - renewal / enhancement For all loans rated (SB-9) and worse.
Existing loans - rehabilitation / restructuring In all cases
After filling in the affidavit format with all particulars and after duly stamping at the
rate in force in each state for affidavit as well as for an agreement and with additional
stamp duty for notarial act, the affidavit may be got sworn before a notary public. At
places where notary public is not available, the affidavit may be sworn before a
Magistrate duly authorised for the purpose.
x. Other Instruction related to compilation of Opinion Report:

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a. To assist Branch Managers/ Managers (Division)/ Relationship Manager (RM) in
compiling their opinions, Field Officers/ CSO/ Cash Officers will furnish them
with detailed reports on local parties on the Bank’s standard form. These reports
should be clearly and properly worded. Such reports would be kept by the Branch
Managers in loose-leaf binders. The reports, the accuracy of which will be the
responsibility of the concerned Field Officer/ CSO/ Cash Officer, as the case may
be, should contain brief particulars of the business conducted by the parties, their
creditworthiness, the profits earned in the recent past and the respectability and
integrity of the partners. The Branch Managers/ Managers (Division)/ RM should
scrutinize each such report before compiling the final opinion sheet to ensure that
the statements made therein are correct. In this connection, it is essential that
Branch Managers should impress upon employees concerned the paramount
necessity for compiling opinions on a very conservative basis. The estimates of the
worth arrived at by the Cash Officer/ CSO/ Field Officer should be conservative
and lower than the assessment of the outside parties.
b. Branch officials, while making enquiries, should exercise tact and discretion and
avoid irritating well-known constituents of good standing by calling for
inquisitorial details.
c. Compiling fresh Opinion Reports during change in incumbency of Field Officer/
CSO/ Cash Officer/ Branch Manager has since been dispensed with.
d. All opinion reports should contain a signed summary of the Branch
Manager’s/ Manager’s (Division)/ RM’s own estimate of the borrower’s standing,
total means and the break-up worth of his immovable properties. In the case of
partnership firms, the total means and the break-up worth of individual partners
should be separately detailed. The summary should be the principal item in each
opinion sheet and should be recorded afresh annually in the manner laid down.
e. The names of partners or the family members, as the case may be, should be
furnished at the place provided in the opinion sheet.
f. The total value of both the immovable properties and liquid assets of each
partner should be given separately.
g. In estimating means, separate conservative estimates of immovable and
movable properties should be made and the total worth arrived at by adding both
figures. In the case of the latter, investments, stocks, cash, etc., should be detailed
as at the date of the opinion. Investments in units on account of land and machinery
or working capital should be specified and names of the particular unit recorded.
h. In computing the liquid assets of firms, the value of shares in limited
companies held by the partners, proprietors, etc., of these firms should not be
included at face value, particularly if the scrip is not quoted on the stock exchange
and/or is not readily marketable. The full-face value of shares can be taken into
account in assessing the holder’s means only if the companies, whose capital these
shares represent, are first class running concerns which have been continuously
making good profits in the past and whose outside liabilities do not outweigh their
easily releasable assets.
i. While compiling opinion on a company director, whose guarantee i s obtained
for an advance granted to the company, his investments in the company should be
ignored as such investments will form part of the company’s tangible net worth.
j. Full details of the movable and immovable properties, in whose names the
properties stand, status of ownership, municipal survey numbers of buildings
(where available), very conservative estimates of their value and realisable value,
whether they are free from encumbrance, etc. should be given for proper

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 identification and assessment of the estimated net worth.
k. The location of the immovable properties and in the case of land, the acreage should
be stated. Enquiries must be made as to whether the properties are free from
encumbrances and the result of these enquiries should be recorded in the opinion
sheets. If any of the properties are encumbered, the fact should be clearly stated, as
also the extent of the encumbrance, which should in addition, specifically appears
among the liabilities. As far as possible, written statements of their properties
should be taken from the borrowers/ guarantors.
l. Particular care should be taken in evaluating properties owned by parties jointly
with others; as a rule, such properties should be disregarded in arriving at the net
means. In the case of partnership firms, it should be ascertained and recorded with
properties, if any, are the personal properties of the individual partners
m. In respect of agricultural land, the nature of land i.e., wet, garden and dry
agricultural lands should be mentioned and conservatively valued.
n. Valuation of house properties should be given by the Field Officer/ CSO/ Cash
Officer separately for each building. Where valuation of property by the bank
officials is difficult, it may be got done by a Government approved valuer/ Banks
empanelled valuer at borrower’s cost which should be reasonable.
o. For loans above Rs. 1.00 Cr, wherein primary/collateral offered as security is value
above Rs. 50.00 lacs, valuation reports (not older than 3 months for new connection)
from 2 empaneled valuers are to be obtained and in case value of property is below
Rs. 50 lacs, single valuation is to be obtained. Both the valuations to be conducted
simultaneously and time gap between these two valuation reports shall not be more
than a month.

p. Where valuations of properties have been increased as compared with the

previous report, the reasons therefore should invariably be given.
q. Properties standing in the name of a constituent/ partner/ proprietor jointly with
others should generally be disregarded. Properties should be valued individually
and not in a group. Where in exceptional circumstances the constituent’s/
partner’s/ proprietor’s share in such properties is taken into account, the properties
must be conservatively valued. The names of the other joint owners and their
respective shares should be indicated at the end of the relative sheet by means of a
foot-note.
r. Where a party owns properties in areas served by other branches/ operating
units/ processing cells of the Bank, a detailed report should be called for from the
branches/ operating units/ processing cells concerned with particular reference to
the value of the properties and whether they are free from encumbrances. The
valuation of such properties should be based on the report received from the Bank’s
branches/ operating units/ processing cells/ offices concerned.
s. Joint Hindu Families
▪ The names of all members, including those of minors with their dates of birth and
the dates of joint Hindu family letters (in the Bank’s standard form) should be
entered in the opinion sheet. In the event of death of any member, his share in the
family property should be deducted in order to arrive at the fresh net means of the
family.
▪ The dates of birth of the minor members should be diarized and when a minor
member attains majority his signature should be obtained on the existing joint
Hindu family letter and a fresh Joint Hindu family letter should also be taken.

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 Relevant noting should be made on the relative opinion sheet.
▪ Self-acquired properties of individual coparceners should not be taken into
account in arriving at the net means of a joint Hindu family firm. These
properties may be detailed in the particulars of the firm’s assets indicating that
they belong individually to the members concerned but the value thereof should
be deducted at the end when arriving at the net worth of the firm.
▪ Before including the immovable propert ies st anding in t he individua l
names of coparceners in the means of joint Hindu family firms, branch Managers
and Field Officers/ CSO/ Cash Officers should satisfy themselves, after making
the necessary enquiries that the properties in question are in fact family
properties. In addition, they should obtain a declaration from the concerned
coparceners and make an appropriate note to that effect in relative opinions.
▪ Properties of joint Hindu families are sometimes held in the individual
names of coparceners, in which case Branch Managers should satisfy themselves
after making necessary enquiries that the properties in question are in fact ancestral
family properties before taking them into account for arriving at the net means of
the Joint Hindu family firm. In such cases, a suitable declaration should also be
obtained from the concerned coparceners stating that the properties (to be
described in the letter) standing in their names and included in the assets of the
joint family firm are the absolute property of the joint family of which they are
members and that such properties are held by them on behalf of and for the benefit
of the joint family.
▪ As per judgment of the Supreme Court, it was held that an HUF directly or
indirectly cannot become a partner of a firm, because the firm is an association of
individuals. The matter of financing HUF was referred to Law Department at
Corporate Centre. The Law Dept opined as under:
- HUF cannot become a partner of the firm directly or indirectly. As such Karta
in his representative capacity cannot bind the HUF property. Bank cannot
enforce the security of HUF against the loan availed by the above firm as the
property of the HUF is not at all liable for the acts of the firm.
- Karta can act in his individual /personal capacity and become a member of a
partnership. In this case Karta’s rights and obligations are determined by
Partnership Act and not by Hindu Law. Karta will be personally liable for all
acts done by the firm in the above case. Karta’s personal property is liable for
all the acts of the firm.
t. Firms
▪ The names of all partners of firms and the extent of their respective interests
i.e., each partner’s share in capital and profit, etc. should be entered in the
opinion report. The names and particulars of associate firms, i.e., firms having
one or more common partners whether partnership or joint Hindu family-
together with their places of business, must be stated with their respective index
numbers.
▪ If a firm has a lady as a partner, it must be stated whether she is literate
and not purdanashin. It should also be indicated whether or not the lady is in
a position to understand the implications of the Partnership Letter signed by her
and the business transactions the firm is likely to enter into with the Bank.
▪ Minors cannot be partners in a firm; they can only be admitted to the benefit a
partnership already in existence. The investments of minor partners should,
therefore, be deducted in arriving at the net means of partnership firm; the
partners’ investment in associate firms will also have to be accounted for in a

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 similar manner.
▪ Whenever ancestral properties of any partner acquired by him on division of
the Joint Hindu Family to which he belonged are included in the means of the
partnership firm, a letter should be taken from the other coparceners of the
partner’s family – which as a result of the division would constitute a separate
Joint Hindu Family – authorising the partner to represent the family as its
nominee and a note to that effect should be made in the relative opinion sheet.
In the case of registered partnership firms, the details of the partnership are
on record at the Registrar’s office. Short particulars of the partnership deeds,
if available and the dates of the partnership letters should be recorded.
u. Associate concerns
▪ Associate and identical firms, if any, must be indicated in red ink at the top
of the opinion sheet with relative index numbers.
▪ For the purpose of compilation of opinion reports on the proprietor/partner,
investments in associate firms should be ignored in order to avoid double
counting.
▪ When compiling opinions on firms associated with one another, it is essential
to show details giving the full worth of the firm reported on, less the amounts
allocated as their investments in other associate firms.
▪ The full worth will ordinarily consist of the total worth of all locally resident
partners together with the amount invested in the firm by outside partners. A
deduction must be made (and shown in the opinion sheet) of all amounts
invested in other firms and allocated to the worth of these firms. The
allocation may be in the form of cash or properties and the deduction under
these categories should be shown separately.
▪ The same property, cash or other assets should not be included in the worth of
more than one firm.

v. Independent Parties’ Reports

▪ Branch Managers / Managers (Division) / RM need not rely solely on the
reports submitted by their Cash Officers/Field Officers. They may obtain
independent confirmation of the information gathered by the concerned
officers when advancing the Bank’s money.
▪ Corroborating reports should normally be obtained from independent parties
enjoying good standing in the locality i.e., members, partners, or proprietors of
respectable concerns established locally and not from their paid employees.
▪ Third party reports must contain estimates of the immovable properties of the
firm reported upon. Where there is any wide divergence between the
estimates of the Cash Officer/ Field Officer and the corroborative reports
from third parties, the reasons for the divergence should be investigated and
recorded by the Branch Managers / Managers (Division) / RM/CSO. Outside
parties’ reports should contain their comments on the subject firm’s
creditworthiness, net worth estimates including immovable property details,
overall trustworthiness of the promoters/ proprietor/ partners.

1.2.5 Security for Advances:

i. Obtaining security against loan is one of most common risk mitigation practices of the
bank. These loans are classified as secured loans. Normally, there are two types of
assets available to the bank as security in case of financing an activity which are
categorized as under:

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 Primary Security: Security of those assets which will be created out of the proposed
bank finance (part or full value of assets). For example, hypothecation of stocks, book
debts etc. for working capital loans and Plant and Machinery etc. for Term Loans.

Collateral Security: Security of those assets which will not be created out of the
proposed bank finance, other than Primary Security.

Apart from security, we are also obtaining personal guarantee of proprietor/ partners/
directors / etc. of the entity or third-party guarantee as risk mitigation practices.

Wherever, Collateral security from third party is obtained, personal/corporate

guarantee of owner of collateral security is desirable.

Further, if third party collateral is from Corporate (Non individual) entity, a detailed
due diligence should be done on the financial of the corporate to look for any
financial stress/insolvency.

Collateral security norms:-

For MSE Sector (both Manufacturing and Services enterprises) no collateral security
is to be obtained for loans upto Rs. 10 lacs (this is also a RBI directive), and for loans
above Rs. 10 lacs and up to Rs. 15 lacs the sanctioning authority may consider
waiving collateral security subject to compliance with certain conditions.

For this sector, the Bank has decided to cover all eligible SME advances upto Rs. 200
lacs (manufacturing and services) and upto Rs.100 lacs (retail trade) under CGTMSE
scheme. The cost of guarantee i.e., Annual Guarantee Fee (AGF) shall be borne by the
borrower for all loans (CC &TL) sanctioned on or after 01.07.2017 (irrespective of
the amount, including renewal of Cash Credit facilities). The matter of recovery, or
absorption, of guarantee fee by the Bank is reviewed from time to time.

CGTMSE has introduced “Hybrid Security” product, wherein collateral security can
be obtained for a part of the credit facility whereas remaining part of credit facility,
upto a maximum of Rs. 200 lacs (manufacturing and service) and upto Rs. 100 lacs
(retail trade) can be covered under CGTMSE scheme.

Advances to non farm enterprises in Manufacturing, Trading and Services with credit
limits upto Rs. 10 lacs are normally classified under Pradhan Mantri Mudra yojana
(PMMY) and covered under Credit Guarantee Fund for Micro Units (CGFMU).

Other borrowers may be sanctioned credit facilities under Bank’s regular schemes.

ii. Though primary security is required to be charged in favour of almost in all the cases,
obtaining collateral its value depends on activity proposed to be financed, scheme
under which it is being financed and risk perceived in the proposed finance.

The collateral security norms applicable for SME accounts under trade and services
sector are as under:
- Collateral Security norms are linked to the Internal CRA/CUE rating of the
borrower instead of ECR Rating as under:

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 Loans upto Rs. 1 Crore:
Aggregate Exposure Minimum Collateral Security
(% of aggregate exposure)
Upto Rs. 10 lakhs Nil. Accounts to be mandatorily covered under CGFMU/
CGTMSE
>Rs. 10 lakhs and upto i. For Accounts covered under CGTMSE: NIL
Rs. 1 Crore ii. For Accounts not covered under CGTMSE: 50%

Loans above Rs. 1 Crore:

CRA/CUE Minimum Collateral Security
(% of aggregate exposure)
SB-7/CUE-7 & better 25%
SB-8,9/CUE-8,9 50%
SB-10/CUE-10 or worse 100%

Authority for approving relaxation in Collateral Security Coverage:

a. CGM (Circle)/CGM (BU) may permit relaxation upto 25% in collateral security
coverage for existing units having internal rating SB-9/CUE-9 and better on case-to-
case basis.
b. ECR of the borrower shall be reckoned for this purpose
c. No discretion for units rated SB-10/CUE-10 and worse

- For existing units, in case of shortfall in Collateral security coverage on account of

proposed norms, limits to be renewed at existing level only. A period of one year
may be permitted by the Sanctioning Authority to enable the borrowal unit to bring
in the required collateral.

- Personal Guarantee should be mandatory for all units. Any deviation is to be

permitted by an authority one step higher than the Sanctioning Authority.
- In case of Term Loans, if Fixed Asset Coverage Ratio (FACR) is 1.25 or more, no
additional collateral security should be insisted upon, otherwise 25% collateral
should be taken.
- A cap of Rs. 3.00 Crs for Term Loan is stipulated where there is no asset creation.
- 100% Cash flow should be routed through the account maintained with our Bank.
- The above collateral security stipulations shall not be applicable to credit facilities
which are sanctioned under product-specific Schemes or covered under CGTMSE.

1.2.6 Time norms and other guidelines for monitoring disposal of credit proposals:
The detailed guidelines on time norms as applicable to the MSME & C&I are as under.
Particulars Timeline for Loan Application Disposal
All loans upto Rs.25 lac 14 days
Loans of Rs.25 lac and above upto Rs.50 lac 14 days
Sanction in case of takeover 14 days
Time norms for Relationship Manager
Limits above Rs.50 lac upto Rs.5 Crore 22 days
Time norms for Relationship Manager
Limits above Rs.5 Crore 22 days

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For mo n it o r i ng disposal of credit proposals within t he above time frame, branches
should adopt the following procedure:
i) Loan applications received from units should be acknowledged by branches
immediately on receipt of the application and entered in the “CRM/Loan Applications
Received and Disposal Register” care being taken to ensure that a segment-wise
serial number (i.e., C&I–1, C&I–2, …,MSME-1,.. etc.) given in the
acknowledgement is also recorded on the main application.
ii) After receipt of the loan application, an indicative checklist of data/papers, etc.
required to be furnished may be given to the applicants. Further, in the context of
discussions held on the project during the initial meetings, the data/information
requirements of the Bank should also be specified to the prospective borrowers so
that they submit applications complete in all respects. The credit appraisal officers
may ask, as far as possible, all relevant information in one installment and avoid
piecemeal queries at various stages. A definite date may be indicated for discussion,
clarification, etc., if considered necessary. The period for the purpose of the
timeframe would be reckoned from the date the application is received complete in
all respects till the credit decision is finally communicated to the applicant. The
decision of the Branch regarding credit assistance should be communicated to the
applicant within the stipulated time period even though the unit might go into
production after some time.
iii) Every meeting/interface with the applicants should be used to emphasis the need for
submission of complete particulars/data to facilitate quick and timely disposal of loan
proposals.
iv) The Branch Manager/Manager of the Division should verify the ‘Loan
Applications Received and Disposal Register’ at periodic intervals to monitor
disposal of proposals received/pending at the Branch. Date and status of disposal of
applications by way of sanction/rejection, if rejected the reasons, therefore, should be
recorded in the register. This register should be scrutinised by the controlling
authorities during their visits to the branches.
v) Each branch will submit to its controlling authority a monthly status report on
pending loan applications indicating the reasons for the delay. The controller, in
turn, will advise the LHO the consolidated position each month.
vi) Branches should not indulge in any act such as verbal promise or issue any
consent letter to sanction loans pending formal sanction, etc., which may give false
hopes to the prospective borrowers.
vii) Third Party Agencies such as surveyors, engineers, financial analysts, and other
verification agencies, etc. play a critical role in assuring financial information,
proposals, work completion status, application of funds, etc. Lenders rely
significantly on the inputs issued by such third parties. Reports are made as a routine,
with little scrutiny. In some situations, the reports may be drafted under the influence
of unscrupulous borrowers. It is therefore important that the selection of such third
parties is independent, done in a transparent manner and based on their capability and
credentials.

1.2.7 Our Bank has issued stage wise Standard Operating Procedure for the sanction
of Credit Facilities as under:

Stage-I: - Lead Generation, Preliminary KYC, Market Reputation, customer contact,

customer meeting, obtention of Application form/KYC documents, Sanction letter of existing

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bank(s) in case of takeover of loan, ECR letter, if applicable, Obtention of statement of
accounts for past 12 months, Securities details.

On the basis of above documents, conduct a preliminary assessment of the proposal, take a
view whether proposal is as per bank’s loan policy and other circular instructions / guidelines
issued by the bank from time to time and if found acceptable go for further documents
mentioned in stage 2.

Stage-2:- Obtention of financials, ownership documents, profile of the unit, Associate

concerns details, All statutory approvals, in case of Term loan (Project report), other
borrowing details, IT returns, GST/VAT returns, premises lease agreement (in case of rented
premises), Assets and liabilities statements of promoters and guarantors, details of share
holding pattern, Processing fee.

On the basis of above documents operating functionaries can perform following

activities:
Discreet enquiries should be made, financial verification, Credit Information report from the
existing bankers, do the CRA/CUE, pricing negotiation with the customer, Pre sanction
survey of unit and collaterals etc.

Stage-3:- Obtain the following documents from the customer-

If TL availed from other lender – copy of sanction letter, Title documents, evidence for
investment made so far, Other relevant approvals and operating functionaries can arrange for
TIR of the securities, valuation of securities, TEV study if deemed necessary.

Stage-4: (if the proposal is sanctioned) – Advise the sanction to the unit, documentation,
Disbursement and charge creation.

Stagewise TAT:
Stage Days
Stage-I 7 days
Stage-II 8-10 days
Stage-III 10-12 days
Stage-IV 5-7 days

1.2.7 Illustrative check list of documents to be obtained from the customer; the list will
be handed over to the customer at stage-I and documents will be collected at Stage-2:

Sr. No. Documents to be obtained

1 Proof of identity
2 Proof of residence
3 Applicant should not be defaulter in any Bank/FI
4 Complete set of Audited financials with CARO and Tax audit report for the last
3 years, Provisional Balance sheet if last audited balance sheet is older than 6
months

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5 CMA (I, II, III, IV & V) data duly signed by the promoters / directors, partners,
proprietor etc. Provisional Balance sheet wherever required.
6 Ownership documents
7 Brief profile of the unit, management, key persons, Industry etc.
8 Details of associates, their banking arrangement & financials of associates
9 Copies of statutory approvals
10 Assets and liabilities statement of promoters and guarantors along with latest
income tax returns
11 A confirmation that the statutory dues are regularly paid
12 A declaration from the unit about the existing banking arrangements
13 IT returns, acknowledged copy of ITR must be obtained
14 GST/VAT return
15 Projected balance sheets for the next two years in case of WC limits and for the
period of loan in case of TL (for all case of Rs. 2 lakh and above)
16 If TL is required – Project report
17 In case of rented premises, copy of lease agreement
18 Details of shareholding patterns
19 The customer be advised that 30% of processing fee will be obtained as advance
20 Applicant’s declaration in respect of relationship with the Director/relative of
director of the out and other Banks.
21 In case of takeover of advances, sanction letters of facilities being availed from
existing banker/FI along with detailed terms and conditions
22 Position of account from the existing bankers and confirmation about the assets
being standard with them (in case of takeover)
23 Photocopies of Lease Deed/title deeds of all the properties being offered as
primary and collateral securities
24 Review of account containing month wise sales, production, raw material, SIP
FG, debtors, creditors, Bank’s outstanding for WC limits, TL limits, bills
discounted.
25 Manufacturing process, if applicable

Illustrative check list of documents to be obtained from the customer; the list will be
handed over to the customer at stage-2 and documents will be collected at Stage-3:
Sr. No. Documents to be obtained
1 If TL has been tied up with any FI/other lender, details thereof along with a
copy of the sanction letter.
2 Obtain original title deeds/certified copies (in case of takeover of limits), prior
deeds, Land Tax receipt, Building Tax receipt, possession certificate, location

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 sketch and other relevant papers for TIR of the properties.
3 If some portion of expenditure has already been incurred, obtain the necessary
proof.
4 Obtain letter of allocation of power supply, certificates of utilities availability,
any other documents required to process the proposal, etc.

1.2.8 Illustrative list of Questions that may be asked while interacting with borrower
during pre-sanction credit process:
01. Is finance required for a unit which is yet to be established? Or has it already been
established earlier?
02. If it has been established earlier, when is the unit established?
03. Where is the registered office of the unit located?
04. Are there any branches elsewhere? If yes, where are they located and what is the
activity being conducted at those places?
05. With whom the unit has been banking with previously? Why is the unit seeking fresh
finance from our Bank?
07. What is the line of activity?
08. Who are the promoters/partners/directors?
09. What is the qualification and experience of the management?
10. Whether the unit is involved in manufacturing or is it only trading?
11. How the promoter/entrepreneur is satisfied that the project is technically feasible and
economically viable?
12. What are the other similar units operating in the area?
13. Whether required infrastructure is available in the place of establishment of the unit?
14. What arrangement has been made to meet the requirement of professionals/technical and
skilled labor?
15. From where is the raw material procured? What are the tie-up arrangements?
16. Is any subsidy/margin money/support of any type available either from Government or
any other agencies?
17. Does the activity fall under priority sector?
18. How is margin to be met by the borrower?
19. What are other requirements for the project? Are all approvals for the project in place?
20. What is the length of operating cycle?
21. What is the arrangement for marketing the products?
22. Are the goods sold within the country? Or exported? If exports involved, which are
the countries to which exported?
23. What is the credit available on procurement of raw material?
24. What is the experience of recovery from Sundry debtors?
25. What is the industry profile and prospects?
26. Has the unit reached break-even? If not, what is the estimated time frame?
27. Are audited financials available?
28. Is there any change in the Directors/partners of the firm? If yes, what are the reasons for
the change?

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29. Is there any change of Auditors of the Company/Firm? If yes, what are the reasons for
the change?
30. Is the unit maintaining a Current Account? If yes, with which bank?
31. What would be the end use of funds? What is the finance required for?
32. What is the amount of finance required?
33. What is the basis/justification of the proposed expansion/modernization, if any?
34. What is the security offered for the Bank finance?
35. Does the unit belong to any group of Companies? If yes, what are the other Companies in
the group?
36. Whether any of the other Companies has/have availed finance from our Bank?
37. Are there any intra-group obligations/transactions?

The above list is illustrative only, however, Relat ionship Manager/ Branch may
request addit ional documents/information, if feel necessitated, as per the nature of
activity/business model of the unit.

Key Learnings:

1) KYC- KYC is must. You must first identify the customer. It is better to approach the
customer rather customer approaches you. Sometimes borrower is not selected properly,
he/she is either new customer or introduced by another stranger or middlemen. Normally, do
not involve middlemen, talk to customers directly. Avoid giving multiple loans to single
party/ family or a group, to minors, lunatics or insolvents. It is compulsory to complete all the
KYC norms before even thinking of giving loan. For KYC, the following things are to be
taken care of-

a) Proof of Identity
b) Proof of residence
c) Proof of business address
d) PAN number
e) Photocopies of all these must be verified with original and also get them signed by the
borrower and kept on record.

2) Understanding Credit Cycle- the credit cycle consists of credit opportunity -> Credit
Creation -> Credit management -> Credit Completion -> Credit creation. Whichever branch
you land at, you will find loans in one stage or the other.

3) RBI’s Defaulter List/Wilful Default list- Units/promoters/guarantors must be confirmed

from RBI’s Defaulter’s list/Wilful defaulter list Confirm that borrower/guarantors name do
not appear in the defaulters list and confirmation of same must be put on record.

4) CIC reports – search the CIC reports of the borrower and guarantors in all loan cases and
commercial CIC report in case of firms/ companies. CIC reports should be analyzed
thoroughly viz. whether borrower/ guarantors availed loans from other banks or financial
institutions, is there any overdue amount. There should be documentary proof to satisfy these
irregularities.

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5) Search CERSAI site- if mortgage of property is involved in the loan, then before
proceeding further search should be made on CERSAI site to ascertain that there is no
mortgage outstanding against the property in any other bank/ FI.

6) Loan safety- safety of loan is directly related on the basis on which decision was taken,
type and quantum of credit to be given and terms and conditions of the loan. But practically
no loan is safe as we can’t see what is going on in the borrowers’ mind. Loans with all proper
documentation and all due diligence paid also goes NPA. But still you can wisely apply
points mentioned above and save a going to be NPA loan.

7) Pre-sanction Visit- next step is to visit the residence place of borrower, place of unit and
property to be mortgaged. Pre-sanction visit is basically to determine the “bank-ability” and
access related riskiness of the proposal. Identification of borrower and site must be
ascertained beyond doubt by inquiring from neighbors and other surrounding people. The
whole observations must be noted down and to be placed on the record.

8) Assets and liabilities Reports- assets and liabilities statements of all borrowers/ guarantors
must be prepared on prescribed format mentioning full detail of assets & liabilities duly
signed by borrower/ guarantor and Relationship Manager/Branch Head and to take necessary
proof of asset and liabilities.

9) Balance Sheets – in case of working capital limits 3 years’ balance sheets of the unit along
with income tax/ GST/Sale tax returns etc., Estimated/projected balance sheets/CMA of next
2 years in cases of working capital limits and for the period of loan in case of term loan. The
balance sheets must be thoroughly analyzed and sanction-able limits be assessed. You should
analyze the following points in balance sheet-

a) How is capital or fund raised?

b) How is capital or fund utilized?
c) financial stability of firm.
d) Profitability.
e) Repayment capacity.
f) Expenditure analysis.
g) Sales achieved.
h) Existing loans and liabilities.

10) Project report- project report (for the proposed project if term lending is required)
containing details of the COP including machinery to be acquired, price, name of suppliers,
capacity utilization assumed, production, sales, projected profit and loss and balance sheets
for the period till the proposed loan is to be paid. Project report should be analyzed and
feasibility be ascertained.

11) Credit Rating- credit rating must be done in all the loan cases as per bank’s guidelines.
Rate of interest should be fixed as per credit rating. Credit rating should be done judiciously
based on analyzing balance sheets. Avoid sanctioning loan below Hurdle Rate.

12) Legal opinion- verification of title deed of property to be mortgaged is utmost necessary.
It must be ascertained that it is original not fake, scanned copy or duplicate one. In respect of
TIR, Empaneled Advocate should personally verify that title deed to be mortgaged tally with
the one kept with revenue records. Must get certified copy of the title deed and tally it with

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original Title deed. Also take certificate from advocate that certified copy tallies with the
original one. Thoroughly read the TIR given by the advocate and observe that there is no
objectionable clause which goes against the bank’s interest. Also obtain all the documents
mentioned in the TIR. Here it is also important to personally verify that submitted title deed
belongs to the property you visited earlier. Also make sure that SARFAESI Act 2002 is
applicable on the property. Certificate of change of land use must be taken in case unit to be
financed is to be built on agriculture land.
13) Any additional limit sanctioned against same securities already charged to the bank
ensure-
a) To extend charge to such limits too.
b) All concerned should be kept informed.
c) Acknowledge debt / balance conformation with the borrower.

14) Valuation- valuation of property to be mortgaged is to be done from valuer on banks

panel. Considered value is as per circle rate or realizable value, whichever is lower. After that
realizable value can be considered. Valuation report of the valuer must be thoroughly
analyzed that it should not contain any comment which may harm the bank’s interest on later
stage. The title deed, revenue numbers, area of the land must tally with deed/ legal opinion
and valuation report.

15) Filling of Appraisal note- after verifying all the documents the appraisal note should be
filled. Care should be taken that full detail should be filled and it should be complete in all
respects. Appraisal should reveal whether proposal is fair banking risk. Following points
should be taken care of:

a. Information of the borrower: name, full address, phone numbers, PAN no., date of birth
and net worth and constitution should be given.
b. While processing credit processing figure out both positive and negative points on a piece
of paper.
c. Now compare the proposal with Loan Policy/extant circular instructions of the Bank.
d. Get confidential reports from other Banks and FIs, if applicable.
e. Amount of loan and purpose of loan should be given in full.
f. Constitution of account- whether account is individual/ joint/ co- borrower/ proprietorship/
partnership/ Pvt. ltd. Co/ ltd co. etc.
g. Full details of accounts with other banks, branches should be given, if any.
h. Information of guarantors should be given in detail viz. name. address, PAN number, Date
of Birth, Phone no., net worth etc.
i. Detail of Primary security should be given in full as related to the case e.g. stocks/P&M. If
it is mortgage of property full address as mentioned in the legal opinion should be given
along with date of legal opinion and valuation report and values viz. market value,
realizable value and accountant/ manager with date. If hypothecation of vehicle – its RC
no, date, engines no. value, date of insurance etc.
j. Similarly, for additional security full detail should be given.
k. Balance sheet figures should be given in full, preferable consisting of last 2 years audited
figures, current year’s provisional figures and estimated /projected figures of next 2 years.
Ratios like current ratio, gearing ratio, Debt Equity, ICR, etc. must be calculated and
filled. Observation about balance sheet must be mentioned in the note.
l. Credit rating must be mentioned in the note and based on it rate of interest should be
mentioned by quoting circular no on which it is based.

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16) Repayment- detail of repayment mentioning number/number/number of instalments,
duration in months must be mentioned. If moratorium period allowed, then it must be
mentioned and also mention date of first installment and last instalment.

CHECK YOUR PROGRESS

MCQ-1 A borrower can engage the services of intermediaries for preparation of
financial statements, CMA data etc. for submission to the Bank for availing
loan facilities. The intermediaries can be a ____?
a Chartered Accountants
b Cost Accountants
c Financial Consultants
d Any of the above
MCQ-2 A shell company is an entity that has _____
a No active business
b Usually exists only as a vehicle for another company
c Both a & b above
d None of the above
MCQ-3 At the time of sanction of credit facilities, Valuation report should not be older
than _____ months.
a 3
b 6
c 9
d 12
MCQ-4 In case of Minor, less than 10 years, whose ID is required for KYC.
a Father of the Minor
b Mother of the Minor
c Minor
d The person who will operate the account (Natural Guardian or Legal
Guardian)
MCQ-5 A company has approached us for sanction of credit facilities. What declaration
we should obtain from them before considering the request?
a Declaration regarding whether any credit facilities in any bank / FI /
NBFC and their status.
b Declaration regarding overdue statutory payment obligations
c Declaration regarding credit facilities availed by its associates and
subsidiaries from banking system
d All the above
KEY:
1 D 2 C 3 A 4 D 5 D

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Apply your learning:

Case Let 1 (Pre-Sanction Credit Process)

Mrs. Kamya Arora has been maintaining a SB account with you since 2018. She is also
having one proprietorship concern M/s Kamya Arora & Co. which is engaged in trading of
AC, TV, Fridge, washing machines of Samsung, IFB. Mrs. Kamya Arora is need of WC
limits of Rs. 2.50 crores. The turnover of the said units as on 31.03.2022 is Rs. 37 crores.
She has advised that audited financials will be available after June 2022 as her auditor has
gone abroadbut keeping in view the ensuing summer season, she is in urgent needs of funds.

She has also offered immovable property as collateral security having realizable value of Rs.
2.25 crore in the name of Sh. Jaswant Singh, husband of Mrs. Kamya Arora . The
Relationship Manager in the branch is new one, having only 2 months’ experience. He
approached his Branch Manager to proceed further in the matter. Please help him to find out
the answer to following questions:

Question 1: As per Banks extant guidelines we have to complete KYC formalities of ?

a. Mrs. Kamya Arora only
b. Mr. Jaswant Singh only as he is offering the property.
c. Both Kamya Arora and Jaswant Singh
d. There is no need of KYC formalities as limits will be secured by Collateral
security of Rs. 2.25 crore

Option (c) Both Kamya Arora and Jaswant Singh

Question 2: Whether the limits can be assessed without obtention of Audited balance sheet as
on 31.03.2022?
a. No
b. Yes
c. Can’t Say
d. Yes, after obtaining provisional balance sheet as on 31.03.22 also

Option (d) Yes, after obtaining provisional balance sheet as on 31.03.22 also

Question 3: Who can sign the provisional balance sheet in this case?
a. Proprietor of the unit
b. Statutory Auditor/Chartered Accountants
c. By Proprietor & Statutory Auditor/Chartered Accountant
d. Obtention of provisional balance may be waived by Sanctioning Authority

Option (a) Proprietor of the unit

Question 4: How many TIRs are required in the instant case?

a. One
b. Two
c. Three
d. As per discretion of Branch Head

Option (b) Two

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Question 5: TIR in this case is required for how many years?
a. Thirteen years
b. Twenty-Three years
c. Thirty Years
d. Thirty-Three years

Option (c) Thirty Years

References:
For further details, please refer the following:
1. R&DB/Ops-KYC/KYC/14/2021-22 dated 07.09.21
2. RBI Master Direction on Know Your Customer (KYC) updated as on 09.01.2020
3. Manuals on Loans and Advances, Part-I, Chapter-5: Pre-Sanction Credit Process
4. Manuals on Loans and Advances, Part-2, Chapter-17: Opinion Report
5. CPPD E-Circular S. No. 1176/2019-20 dated 19.11.2019: Credit Information Report
(CIR) on Group Companies
6. CPPD E-Circular S. No. 296/2019-20 dated 07.06.2019: Legal Entity Identifier (LEI)
7. CPPD E-Circular S. No. 179/2019-20 dated 10.05.2019: Obtention of Financial
Statements
8. SMEBU E-Circular S. No. 1577/2018-19 dated 22.02.2019: Collateral Security
Norms for Trade & Service Sector
9. CPPD E-Circular S. No. 1264/2018-19 dated 18.12.2018: ICAI’s Unique Document
Identification Number (UDIN)
10. CPPD E-Circular S. No. 1172/2018-19 dated 29.11.2018: Opinion Report Format
11. SMEBU E-Circular S. No. 1157/2020-21 dated 21.12.2020: SOP for Sanction of
Loans
12. SMEBU E-Circular S. No. 1448/2015-16 dated 25.02.16: SOP for Sanction of Loans
13. CPPD E-Circular S. No. 860/2015-16 dated 07.10.2015: Handbook on Pre-sanction
and Post Sanction – Due Diligence in Advances
14. CPPD E-circular S. No. 993/2015-16 dated 07.11.2015: End to End Credit Process
15. Circular No.: CCO/CPPD-ADV/2/2018–19 Dated 03.04.2018. Central Fraud Registry

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 BACK TO INDEX

CHAPTER 2 B

LEGAL ASPECTS OF ADVANCES

LEARNING OBJECTIVES
1) There are several types of business entities according to their constitution. The
chapter gives an overview of the legal implications involved in dealing with different
types of customer constitutions like Proprietorships, Partnerships, Societies etc. and
to LLP, Private & Public limited companies generally referred to as Non-corporate
and Corporate Segments.
2) Title Investigation for establishing the chain of title in favour of the owner of property
is an exhaustive and a very important function for the Bankers. Similarly, valuation
of property is a crucial activity. Bank has prescribed detailed guidelines for these
activities, which can be learnt from this chapter.
3) SME Documentation scheme is detailed in the chapter. Documentation, basically,
consists of Formation of Lender – Borrower Contracts, Various agreements with the
Borrower and Guarantor in fulfilment of the contract and creation of various charges
like Hypothecation, Mortgage etc. Apart from the said initial documents,
supplemental documents are used for extension of charges (in order to retain priority
of charges) and complimentary documents for revival of documents and linking
documents etc. You will find details of these, in this chapter.
4) Mortgages form a major part of charges created in Bank's favour. While there are
several types of mortgages as per law, equitable mortgage and registered mortgage
are the common types of mortgages preferred by the Bank. Details are given in the
chapter.
5) Charge Creation & Perfection is an important function in lending. The creation of
various types of security interest in favour of the Bank and registering those security
interest at appropriate forums / portals is also mandated by law. Procedures,
prescriptions for Creation of Charges and perfection of charges, viz., Registration of
charges with Registrar of Companies, CERSAI portal etc. and the implications of
non-registration of charges are dealt with in the chapter.

A. CONSTITUTION OF BUSINESS ENTITIES

Businesses operate under different structures and depending on the law applicable to a
particular structure they are classified into various legal entities. Normally, the following are
the types of entities requiring credit facilities.

i. Proprietorship Concerns
ii. Partnership firms
iii. Private & Public Limited Companies
iv. Limited Liability Partnership
v. Trust
vi. Hindu Undivided family
vii. Societies

Special legal provisions applicable to the particular type of borrower has to be kept in mind in
dealing with each type of business entities.

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PROPRIETORSHIPS

Proprietorship is perhaps the simplest form of a borrowing entity. As far as the legal status is
concerned, both the proprietorship and proprietor in individual capacity are considered the
same, though for accounting purposes a proprietorship has to prepare the financial statements,
viz., balance sheet and profit and loss account for an understanding of the financial health of
the concern. The amount invested by the proprietor in the firm will be shown on liability side
of the balance sheet as Capital.

While sanctioning credit facilities to proprietorship firms, it is not necessary to obtain personal
guarantee of the proprietor, as the proprietor is personally liable for any debt of the
proprietorship.

PARTNERSHIPS

Partnerships are governed by The Indian Partnership Act, 1932. “Partnership” is the relation
between persons who have agreed to share the profits of a business carried on by all or any of
them acting for all. Persons who have entered into partnership with one another are called
individually “partners” and collectively a “firm”, and the name under which their business is
carried on is called the “firm name”. The relation of partnership arises from contract and not
from status.

It is preferable to finance partnership firms which are registered with the Registrar of Firms
of the local area. The loan account should be opened in the name of the firm and not in the name
of the individual partners irrespective of the fact that one or more of the partners may be
authorized to operate the account. Apart from collateral security, if any, by way of personal
guarantee of a third party, personal guarantee of the partners should be obtained especially when
the firm is not registered as per the Partnership Act. This is to make them jointly and severally
liable to the Bank for the dues of the borrowing firm. The partnership deed, which is an
agreement between all the partners containing terms & conditions of partnership as well as
rights and liabilities of individual partners, must be examined carefully.

No credit facility should be provided to a partnership firm for any activity which has not been
mentioned in the partnership deed as it may prove to be Ultra Vires (beyond the scope or more
than legal power or authority) of the executed deed between partners.

Whenever changes take place in the constitution of the firm either by death, retirement,
insolvency, expulsion or inclusion of partner, a new partnership is formed. In such cases, the
limits granted to the old firm should be cancelled and credit facilities extended to the
reconstituted partnership firm after examining afresh the creditworthiness of the partners of the
firm and other relevant factors for taking a credit decision. Till the formalities concerning
reconstitution of the partnership of new firm are completed and necessary loan documents are
executed, as interim measure for the sake of continuity of business activity, operations in the
existing Bank account may be permitted only after obtaining a stamped continuing letter of
guarantee signed by all the outgoing partners as well as the incoming partners. Where personal
guarantee of third party has been obtained, confirmation from the guarantor must also be
obtained before allowing operations in the existing account. It should be ensured that the
necessary formalities are completed within a period of two months.

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In case a firm has been granted term loan, on reconstitution of the partnership, a supplementary
agreement owning up the liability and repayment of the outstanding loan should be obtained.

Where reconstitution takes place in case of a partnership firm, which has created equitable
mortgage of immovable property of the partnership firm in favour of the Bank for collaterally
securing the loans, an agreement on prescribed proforma should be obtained without disturbing
the existing mortgage.

A person must have a distinct legal entity as recognized by law e.g., Individuals, Company etc.,
to be a partner in a partnership, but a partnership firm cannot be one of the partners in a
partnership firm. Since the Bank insists on guarantee of all the partners, a company (as a
partner) may have to provide corporate guarantee and in which case section 185 & 186 of the
Companies Act 2013 shall be applicable. A company must pass a resolution for executing
necessary documents in this regard.

A minor can be a partner of a partnership firm, however he cannot be held liable personally for
any debt of the firm, so this aspect has to be kept in mind while granting credit facilities to
partnership firms.

To safeguard the Bank’s interest on account of a partner exceeding his implied authority, a
`partnership letter` must also be obtained.

A partnership firm is considered separate entity from its partners and taxed separately.

LIMITED LIABILITY COMPANIES

In dealing with a Limited Liability Company, the foremost requirement is the company’s
Memorandum and Articles of Association and Certificate of Incorporation. From a scrutiny of
the Memorandum & Articles of Association, it would be revealed whether the purpose of
borrowing is consistent with the stated objectives and whether the advance is within the
borrowing powers of the company. It has to be ensured that no prior charge exists over any
of the assets being offered as security and that the persons executing the security documents
and operating the account(s) are duly authorized.

A company’s borrowing powers are usually specified in the Articles of Association, but they
may not always be limited to a fixed amount. When no mention of borrowing is made, a trading
company may generally be presumed to have power to borrow for the purpose of its ordinary
business, but no advance should be sanctioned in such circumstances without prior reference
to the controlling office.

The powers of a company (public or private) to borrow may be exercised by its Board of
Directors by means of resolutions passed at a meeting (and not by circulation). All advances
granted to companies must, therefore, be supported by resolutions so passed.

Proposals for a new advance to a company must be accompanied by copies of its last three
years’ (Audited) Financial Statements. Supplementary statements showing (a) details of the
Company’s borrowings from all sources and the securities offered and (b) the value of the
stocks of the company should also be submitted to the sanctioning authority with the analysis
of every balance sheet.

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Before a term loan is granted to a company, a certificate should be obtained to the effect that
the total borrowings from all sources for the purpose of financing expenditure of capital nature,
including the loan applied for from the Bank would not exceed the limit prescribed under
section 180(1)(c) of the Companies’ Act.

Companies’ Act, 2013 – Sec. 180.1

“The Board of Directors of a company shall exercise the following powers only with the
consent of the company by a special resolution, namely:-

(c) to borrow money, where the money to be borrowed, together with the money already
borrowed, by the company will exceed aggregate of its paid- up share capital and free
reserves and securities premium, apart from temporary loans obtained from the company’s
bankers in the ordinary course of business…”

In terms of this section, the powers of a public company or a private company which is a
subsidiary of a public company to borrow by way of term loan together with money already
borrowed for capital expenditure are restricted to the amount of its paid-up capital plus free
reserves. Any borrowing in excess of this amount is subject to the consent of its shareholders
in a general meeting by means of a special resolution.

Before granting an advance in any form to a limited liability company, a search of the records
of the Registrar of Companies should be done to ensure that no prior charge exists over the
security offered.

If a company has issued debentures, it must be ascertained from the Debenture Trust Deed that
the assets the company proposes to charge to the Bank are not already charged to the Debenture
holders. If there is any doubt on the point, a deed of release must be obtained from the Debenture
Holders or their trustees in terms of the Debenture Trust Deed. When debentures are issued by
a company whose stocks etc. are already pledged or hypothecated to the Bank, extra care should
be taken to ensure that the Bank’s interest is not jeopardized.

Branches should not provide loans to companies for buy-back of shares / securities. In terms
of Section 68 of the Companies Act, 2013, companies have been permitted to purchase their
own shares or other specified securities out of their free reserves, funds in securities premium
account or the proceeds of any shares or other specified securities.

At the time of renewal / enhancement / sanction of an advance relating to a company that has
accepted public deposits, a certificate should be obtained from the company to the effect that it
has not defaulted in payment of interest / principal to small depositors and that the company
has complied with the provisions of Section 73 of the Companies Act, 2013 along with a
confirmation by the Statutory Auditors of the Company. It should also be verified with the
NCLT for any notice of default filed by the Company in terms of Section 73. This is to be done
at the office of the NCLT having jurisdiction over the place where the registered office of the
borrowing company is located.

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TYPES OF COMPANIES

Public & Private Company:

Based on the number of members and capital, companies may be classified into (i) Public
Companies & (ii) Private Companies. As per the Companies Act, 2013 a private company must
have minimum of 2 members and a maximum of 200 members. One Person Company is a
private company with only one member. The Companies Act restricts the rights of members of
a private company to transfer its shares and also prohibits an invitation to the public to
subscribe to any shares or the debentures of the company.

A public company means a company, which is not a private company. A private company which
is a subsidiary of a public company is deemed to be a public company. A public company must
have a minimum of 7 members. A public company can issue shares to the general public and
the transferability of shares and related issues etc. are controlled by SEBI. As per the Act, both
the Private as well as Public companies can start its operations only after obtaining Certificate
of Incorporation and Certificate of Commencement of Business.

Minimum Paid-up Share Capital

The minimum paid-up share capital requirement of INR1L (Pvt. Ltd.) and INR5L (Pub. Ltd.)
under Companies Act, 2013 has been done away with by the Companies (Amendment) Act,
2015 which received the assent of the President of India on 25MAY15

A COMPARISON OF PRIVATE & PUBLIC LIMITED COMPANIES BASED ON

FEATURES

Basis for comparison Public Company Private Company

Meaning Owned and traded publicly Owned and traded privately
Minimum Members 7 2
Maximum Members Unlimited 200
Minimum Directors 3 2
Suffix Limited Private Limited
Start of Business After receiving certificate of After receiving certificate of
incorporation and certificate of incorporation and certificate of
commencement of business commencement of business
Statutory Meeting Compulsory Optional
Issue of prospectus / Obligatory Not required
statement in lieu of
prospectus
Public subscription Allowed Not Allowed
Quorum at AGM 5 members in person 2 members in person
Transfer of shares Free Restricted

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HOLDING, SUBSIDIARY & ASSOCIATE COMPANIES

Companies are classified as Holding, Subsidiary or Associate companies on the basis of control.
A company is treated as subsidiary of another company if the latter controls the composition of
the Board of Directors; or holds more than half in face value of equity share capital of the
former. Thus, if A Ltd has equity capital of Rs. 4 cr out of which B Ltd. holds shareholding of
Rs. 3 cr, then B Ltd. is a holding company and A Ltd. is the subsidiary of B Ltd.

The Act defines an Associate company (say, A) of another company (say, B) where B exercises
a significant control over A (by controlling at least 20% of the total share capital of A, or the
business decisions under an agreement). If A is a joint venture partner of B, both the companies
enjoy the status of associate companies to each other. But, the company A will cease to be an
associate company of B, if it happens to the latter’s (B’s) subsidiary company.

GOVERNMENT COMPANY

A Government company is one in which not less than 51% of paid-up share capital is held by
the Government (Central / State). A subsidiary of a Government company is also a Government
company.

SECTION 185, 186 OF COMPANIES ACT, 2013

Relevant extracts of the amendments (notified in the Official Gazette dated 3 rd January, 2018)
to the Companies Act, 2013
61. For section 185 of the principal Act, the following section shall be substituted, namely:—
'185. (1) No company shall, directly or indirectly, advance any loan, including any loan
represented by a book debt to, or give any guarantee or provide any security in connection with
any loan taken by,—(a) any director of company, or of a company which is its holding
company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.
(2) A company may advance any loan including any loan represented by a book debt, or give
any guarantee or provide any security in connection with any loan taken by any person in
whom any of the director of the company is interested, subject to the condition that—
(a) a special resolution is passed by the company in general meeting: Provided that the
explanatory statement to the notice for the relevant general meeting shall disclose the full
particulars of the loans given, or guarantee given or security provided and the purpose for
which the loan or guarantee or security is proposed to be utilised by the recipient of the loan
or guarantee or security and any other relevant fact; and
(b) the loans are utilised by the borrowing company for its principal business activities.
Explanation.—For the purposes of this sub-section, the expression "any person in whom any
of the director of the company is interested" means—
(a) any private company of which any such director is a director or member;
(b) any body corporate at a general meeting of which not less than twenty-five per cent. of the
total voting power may be exercised or controlled by any such director, or by two or more such
directors, together; or

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(c) any body corporate, the Board of directors, managing director or manager, whereof is
accustomed to act in accordance with the directions or instructions of the Board, or of any
director or directors, of the lending company.
(3) Nothing contained in sub-sections (1) and (2) shall apply to—
(a) the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) a company which in the ordinary course of its business provides loans or gives guarantees
or securities for the due repayment of any loan and in respect of such loans an interest is
charged at a rate not less than the rate of prevailing yield of one year, three years, five years or
ten years Government security closest to the tenor of the loan; or
(c) any loan made by a holding company to its wholly owned subsidiary company or any
guarantee given or security provided by a holding company in respect of any loan made to its
wholly owned subsidiary company; or
(d) any guarantee given or security provided by a holding company in respect of loan made
by any bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company
for its principal business activities.
(4) If any loan is advanced or a guarantee or security is given or provided or utilised in
contravention of the provisions of this section,—
(i) the company shall be punishable with fine which shall not be less than five lakh rupees but
which may extend to twenty-five lakh rupees;
(ii) every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to six months or with fine which shall not be less than five lakh
rupees but which may extend to twenty-five lakh rupees; and
(iii) the director or the other person to whom any loan is advanced or guarantee or security is
given or provided in connection with any loan taken by him or the other person, shall be
punishable with imprisonment which may extend to six months or with fine which shall not be
less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.’.
62. In section 186 of the principal Act,—
(i) in sub-section (2), the following Explanation shall be inserted, namely:—
'Explanation.—For the purposes of this sub-section, the word "person" does not include any
individual who is in the employment of the company';
(ii) for sub-section (3), the following sub-section shall be substituted, namely:—
'(3) Where the aggregate of the loans and investment so far made, the amount for which
guarantee or security so far provided to or in all other bodies corporate along with the
investment, loan, guarantee or security proposed to be made or given by the Board, exceed the
limits specified under sub-section (2), no investment or loan shall be made or guarantee shall

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be given or security shall be provided unless previously authorised by a special resolution
passed in a general meeting:
Provided that where a loan or guarantee is given or where a security has been provided by a
company to its wholly owned subsidiary company or a joint venture company, or acquisition
is made by a holding company, by way of subscription, purchase or otherwise of, the securities
of its wholly owned subsidiary company, the requirement of this sub-section shall not apply:
Provided further that the company shall disclose the details of such loans or guarantee or
security or acquisition in the financial statement as provided under sub-section (4)”.
(iii) for sub-section (11), the following sub-section shall be substituted, namely:—
"(11) Nothing contained in this section, except sub-section (1), shall apply—
(a) to any loan made, any guarantee given or any security provided or any investment made
by a banking company, or an insurance company, or a housing finance company in the ordinary
course of its business, or a company established with the object of and engaged in the business
of financing industrial enterprises, or of providing infrastructural facilities;
(b) to any investment—
(i) made by an investment company;
(ii) made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in
shares allotted in pursuance of rights issues made by a body corporate;
(iii) made, in respect of investment or lending activities, by a non-banking financial company
registered under Chapter III-B of the Reserve Bank of India Act, 1934 and whose principal
business is acquisition of securities.";
(iv) in the Explanation, in clause (a), after the words "other securities" the following shall be
inserted, namely:—
"and a company will be deemed to be principally engaged in the business of acquisition of
shares, debentures or other securities, if its assets in the form of investment in shares,
debentures or other securities constitute not less than fifty per cent. of its total assets, or if its
income derived from investment business constitutes not less than fifty per cent. as a proportion
of its gross income.".

LIMITED LIABILITY PARTNERSHIPS (LLP)

LLP is a new corporate form designed to provide an alternative to the traditional partnership
(with unlimited liability on part of the partners) and the corporate statute (statute-based
governance with limited liability on part of the shareholders). The LLP form of business is a
hybrid structure between the two, which provides the benefits of limited liability but allows the
partners the flexibility of organizing their internal structure as a partnership based on a
mutually arrived agreement. The Limited Liability Act, 2008 allows two or more persons
associating for carrying on a lawful business ‘with a view to profit’ to set up an LLP.

LLP is a separate legal entity which is liable to the full extent of its assets, but the liability of
the partners is limited to their agreed contribution in the LLP. Like a corporate, an LLP can
continue its existence irrespective of changes in partners.

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In a traditional partnership, every partner is jointly and severally liable with all other partners
for all acts of the firm done while he is a partner. As against this, liability of a partner is limited
to his agreed contribution in the LLP structure.

One of the important differences between an LLP and a company is that the internal governance
structure of a company is regulated by statute (i.e. Companies Act, 2013), whereas for an
LLP, the internal governance is governed by a contractual agreement between the partners.

There is no ceiling regarding maximum number of partners. Each LLP must have minimum
two designated partners, one of whom must be a resident of India.

The partners in an LLP agree and sign on an agreement known as ‘LLP Agreement’. However,
entering into an LLP agreement is not mandatory. In the absence of an LLP agreement, the
mutual rights and liabilities of an LLP and its partners are determined by the provisions
described under Schedule I to the Act.

Every LLP must register itself with the Registrar of Companies (ROC). Unlike companies,
LLPs do not attract ‘Dividend Distribution Tax’ and ‘Minimum Alternate Tax’.

HINDU UNDIVIDED FAMILY (HUF)

An HUF is represented by the head of the family, known as Karta, and the members of the HUF
are known as coparceners. Karta represents the HUF and is authorized to transact on behalf of
the HUF by virtue of age old practice sanctified by law.

With the introduction of Hindu Succession (Amendment) Act 2005, from September 6,
2005, daughters are also given the status of a coparcener.

Banks should obtain a letter of authority in favour of the Karta signed by all major coparceners,
which is commonly known as JHF letter. This letter contains the names of the family members,
the minors, and a declaration that any change in the family constitution shall be duly brought
to the notice of the Bank.

Karta manages the HUF property on behalf of his family members. However, his powers are
limited and a charge created by him is binding on the family property only when the loan taken
by him is:
a) For the purposes of the necessity of the family or,
b) For the benefit of the family or,
c) For repayment of a lawful antecedent debt due from the family.

The liability of the Karta is unlimited, though the liability of the coparceners is limited to the
extent of their shares in the HUF property. However, Banks act conservatively and obtain
documents executed by all major coparceners of the HUF including the Karta. This makes the
coparceners jointly and severally liable for all the loans and advances that may be taken by the
Karta.

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TRUSTS

The Indian Trusts Act, 1882 defines a Trust as an obligation annexed to the ownership of
property and arising out of a confidence reposed in an accepted by the owner, or declared and
accepted by him, for the benefit of another, or of another and the owner.

A Trust is formed for the benefit of certain person(s) or purpose. The Trust Deed contains the
aims and objectives of the trust. It lays down the duties and responsibilities of the Trustees and
also the restrictions/ limitations imposed on them.

In almost all the cases, the borrowing powers of the Trustees are severely restricted. Trust
deed generally permits borrowing by the Trust. The provisions of the Trust deed relating to
borrowings from Banks/ FIs must be interpreted in a very strict sense.

Operations of Trust accounts have to be strictly according to provisions of the Trust deed.

CO OPERATIVE SOCIETY

While considering credit facility to a co-operative society, it is necessary to examine the rules
or bye-laws of the society, especially the terms on which it can borrow under the relevant
section of the State Co-operative Societies Act, 2002.

The lending bank should obtain a certificate from the society stating that the credit facility
sought is within the overall borrowing limit authorized by the Registrar of Co-operative
Societies.

Questions

1. Why do we insist on financing a partnership firm which is registered? What may be the
implications of financing partnership firms which are not registered?

2. What are the key features of a Limited Liability Partnership?

3. How do we define Holding, Subsidiary & Associate companies? What is the

relationship between such companies?

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B. TITLE INVESTIGATION REPORT (TIR)

Master Circular on Title Investigation Report- Revision Cir. No. Circular No.:
CCO/CPPD-ADV/129/2021 – 22 Dated 9th Feb 2022

1. Introduction

1.1 Title investigation is to be conducted in respect of all types of immovable properties that
are to be accepted as mortgage security.

Title investigation has the following aspects:

i. Examination of the documents to title (of the property) by an empanelled advocate.

ii. Examining the acceptability of the property as security based on the TIR report issued
by the Panel Advocate; and
iii. Physical verification of the property for verifying the details.

1.2.1 TIR shall be obtained only from the Banks empanelled Advocate (Advocate is to be
identified through the LLMS / RLMS / VVM which has a master database of TPEs regarding
centralised monitoring, work order allotment, tracking the status of work orders, performance
tracking and evaluation of services offered before payment / renewal of contract of TPEs.

The Law Officers posted at respective AOs / BUs shall be the nodal officer for updating the list
of empanelled advocates / master database (post categorisation of the advocates) in LLMS /
RLMS portal / VVM. For accounts / borrowers falling under the domain of LLMS, the
assignment of task to the advocate and generation of the letter of allotment will be made through
the LLMS platform involving “maker and checker” concept, i.e. allotment initiated by the
Service Officer and confirmed by the Relationship Manager / Branch Manager. In respect of
Housing Loans, the assignment of task to the advocate shall be done through the RLMS
platform.

The operating unit shall ensure proper distribution of work to advocates, which should be
reviewed by the controllers at regular intervals during the branch / CPC visit. TIRs shall be
obtained only from the advocates at the place where the property is situated.

In case of deviation the approving authority shall be under:

Business Verticals To be approved by

R&DB branches / CPC DGM (B&O)
CCG/CAG branches Controlling authorities

1.2.2 Obtaining two TIRs

In case of the following types of properties, a satisfactory Title Investigation Report (TIR) from
two different empanelled advocates is required to be obtained, irrespective of amount in all
segments (including Housing Loans):-
i. Properties offered by third party guarantors (individual or non-individual).
ii. Properties acquired through Gift deed.

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iii. Properties sold through Power of Attorney holders to our
borrower/guarantor.

Type of Loan One TIR Two TIRs

Loan amount is below Loan amount is Rs. One crore & above
SME & Other Loans Rs. One crore

Housing Loan Loan amount is below a. Where RERA registration is not

Rs. One crore available and loan is Rs. 1 crore
& above (**)
b. Second or subsequent sales and
loan amount is Rs. 1 crore &
above (**)
c. HL where RERA registration is
available and loan amount is Rs.
5 crore & above (**)
(**) where In house legal team created,
one TIR from them and one TIR from
empanelled Advocate.
• New Connections / replacement of existing property / additional property :
where one TIR is stipulated, but the TIR reflects multiple transactions during last 12
months , then second TIR to be taken from in-house legal team/ empanelled advocate.

** Wherever In House Legal Team has been created, one TIR from them and the other
from the empanelled Advocate.

1.3 Where the loan amount is less than Rs.1.00 crore, it would suffice that the advocate makes
search of the title of the property for not less than 13 years.

However, if the flow of title is not clear or in the event of any ambiguity about the title after
search for 13 years, the Advocate may make search for 30 years.

Where the loan amount is Rs.1.00 crore and above, the advocate is required to make search of
the title of the property for not less than 30 years.

In case of Builder Tie Ups (Home Loans) for approval of the project, search of the title for 30
years is mandatory.

1.4. Where TIR is obtained from two Advocates and there is divergence of opinion, matter is
to be referred to Law Officer/ In house Legal Team, for their directions.

1.5 Branches have to search CERSAI (Central Registry) to ascertain the existing charges and
credit history of the borrower / mortgagor. Any doubtful circumstances in respect of the
genuineness of the security offered is to be ruled out. A screen shot of search report / search
report of CERSAI is to be attached with the loan proposal and subsequently preserved with the
security documents.

1.6 In case of Home Loans in addition to the extant instructions, instructions wherever
modified for Housing Loans, as per Annexure-V, should be complied with.

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1.7 The formats for obtaining and verification of TIR have been standardised and are
provided as annexures to the Master Circular dated 9th Feb, 2022. they are –

Annexure A - Letter for assigning the job of TIR to the advocate.

Annexure A1 - Details of the Property offered as security to be prepared by the Branch.
Annexure B - Report of Investigation of Title in respect of immovable Property
Annexure C – Certificate to be submitted by Advocate along with report as per Annexure B
Annexure C1 – Interim Certificate from Advocate (to be taken along with annexure B) in case
of takeover of loans and if the original title documents are not available for scrutiny/verification
by the advocate.

In all such cases, after takeover of the loan is completed and original title documents are
received from the other Bank / Financial Institution, advocate has to complete the scrutiny
/ verification of original title documents and to submit the certificate of title as per Annexure-
C.

Annexure-C2- Certificate of Title on the basis of Parent deed and sale agreement in favour of
the Borrower

Annexure-C3- Certificate of Title (Supplementary TIR)

In case of purchase of property where original title deeds in the name of the seller may or may
not be available for scrutiny and title is yet to be conveyed in the name of the borrower and
only sale agreement is available, the Interim certificate will be obtained as per Annexure-C2
along with Annexure B. Once the registration process is completed, the original sale deed
(conveying the title) and encumbrance certificate for the intervening period will be obtained.
Based on the original title documents (Parent title deeds as well as sale deed in the name of
Borrower) received, advocate has to complete the scrutiny / verification of original title
documents and submit the supplementary TIR certificate as per Annexure – C3.

Annexure D - Guidance Note for the advocates entrusted with the work of issuing TIR for
verifying the genuineness of the documents

Annexure E - Detailed checklist for scrutiny of TIR

Annexure F - Checklist for identification and physical verification of the properties offered as
securities

1.8 Selfie of the Inspecting Official at the site, with or without the borrower should be taken as
an integral part of inspection and the same should be kept along with the security documents.
This exemption (with or without the borrower) will apply in respect of all Loans (including
Housing Loans), as the inspection is required to be conducted independently. Digital date
should be imprinted on the photograph.
Functionality for taking photographs / selfie during inspection is available in e-LLMS app.
Inspecting officials shall take photographs / selfie through the e-LLMS app and the geo tagged
photographs captured through the e-LLMS app shall be printed and attached to the inspection
report submitted by the Inspecting Officials.

Annexure G - Important aspects relating to procedures, precautions and due diligence for
prevention of frauds, etc., in connection with the title investigation creation of mortgage

Annexure H - Separate annexure about the advocates to be entrusted with TIR work

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Annexure H1 - Copy of MOU to be obtained from the advocates who are entrusted with the
work of issuing TIR

1.9 The original title deeds / related documents should be handed over to the advocate
(Annexure A / A1) by the operating unit only and intervention of the borrower / guarantor
should be avoided in the process. The advocate is required to submit the TIR along with all the
original title deeds / documents and certified copies of documents directly to the operating unit
and in no circumstances the same is to be handed over to the borrower/guarantor or his/their
agent/representative.

1.10 The Advocate is required to;

• Make personal inspection of relevant books and indices at the office(s) of sub registrar
/ registrar
• Obtain certificates of encumbrance (wherever such facility is available)
• Obtain the certified copies of all the relevant title documents directly from the office of
the sub- registrar / registrar office and compare the same with the documents submitted
by the customer
• Attach along with the Report (TIR) all such certified copies and the receipt for fees paid
for obtaining certified copies.

1.11 A conditional Title Investigation Report (TIR) certifying clear and marketable title of the
property subject to compliance of conditions or stipulations would not be acceptable.
Professional fees/expenses charged by the advocate should be paid by the Bank directly to them
and recovered from the customer.

1.12 The procedure for creating EM of leased properties such as MIDCO, CIDCO, HUDA,
HSIDC and DDA etc. should also be discussed in the TIR by the Advocate.
A reference may be made to Law Department to clarify the position regarding mortgageability
of such type of properties before accepting them as security.

1.13 Hindu Undivided Family (HUF):- Great care should be exercised in mortgaging properties
of HUFs and Law Officer’s opinion may be sought.

1.14 If the title deeds are in a vernacular, an English translation signed by the Bank’s
empanelled advocate is obtained.

1.15 Wherever Cooperative Housing society is yet to be formed, an undertaking from borrower
should be obtained stating that the Bank would be informed and share certificate along with
NOC submitted as and when the society is formed.

Procedure and Precautions (Annexure G of CPPD/129/09FEB22)

A. General Procedures

• If the original title deeds are not available at the time of conducting title investigation,
the advocate would be required to verify/scrutinise the original title deeds when subsequently
provided and to certify the genuineness. In all such cases, a written confirmation from the
advocate needs to be obtained before disbursement of loan.

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• In respect of loans other than Home Loans, generally 4 days will be reasonable for
submission of TIR.

2. VERIFICATION OF RECORDS OF CENTRAL REGISTRY

• Before creation of any mortgage the branches/ operating units have to verify the
records of the Central Registry of Securitisation, Asset Reconstruction and Security
Interest of India (CERSAI) (www.cersai.org.in) to see that there is no pre-existing charge
registered with Central Registry. Such exercise is also to be conducted at the time of renewal/
sanction of additional limits. Further, a copy of the screen shot of search report / search report
of CERSAI to be attached with the loan proposal and subsequently preserved with the security
documents

• Immediately after creation of mortgages, registration with Central Registry has to be

ensured.

3. IDENTIFICATION OF THE PROPERTY

Identification of the property is one of the most important steps to be undertaken for
creation of a valid security. Certain aspects to be kept in mind in identification of the property
are explained herein.

• Demarcation: Demarcation of the property is important for its identification and

possible enforcement, if required on a later date. Hence, no property should be accepted
as primary security/ collateral security if the property cannot be demarcated. The
Advocates/ Valuers should also be sensitised in this regard.

• Utility Bills : Strengthening of the due diligence process and proper identification of
the property are also a part of measures to avert frauds. Therefore, in addition to all other
existing procedures, the following additional aspects shall also be dully examined and papers
relating to at-least two of the following documents should be verified along with the Title deeds:
(i) Electricity connection
(ii) Water Connection
(iii) Sales Tax Registration
Hence the above documents are also to be made available to the panel advocate preparing
the TIR and he shall furnish confirmation of having verified and taken cognizance of the same
in compiling TIR.

• Approved Plans

The Valuer has to obtain a certified copy of the approved/ sanctioned plan wherever applicable
from the concerned office and to verify the same and attach it with the valuation report.

Valuation report and certified copy of plan obtained by the Valuer should be made available to
the Advocate to verify description and boundaries of the property wherever applicable.
However, the obtaining TIR from the Advocate shall not be delayed for getting the valuation
report and certified copy of plan from the Valuer. Both the valuation and search of title can be
proceeded simultaneously and comments of the advocate on valuation report can be obtained
separately.

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Mutation of the Property

• The mutation of the property in the name of mortgagor should normally be

insisted upon. Exemptions should be satisfactorily explained and efforts should be
made to ensure the veracity of the reasons given by the mortgagor for non- mutation of
the property.
• In such cases the reasons for non-mutation should be cross checked with
Appropriate Authority (Government/Semi-Government bodies like Delhi Development
Authority-DDA, HUDA, etc.).
• Wherever the property is not mutated, without the personal visit to the property by
Branch Manager and/or Relationship Manager/Field Officer same should not be
accepted as security.
• The Panel Advocate should invariably offer his comments on non- mutation.

Inspection of the property

Pre-sanction and post-sanction inspection of the property proposed to be mortgaged is to be

conducted as per laid down instructions. It should comprise of the following:
• Visit to the residence / business place of the borrower /guarantor / third party who has
offered to mortgage his property as a security.
• Discreet independent enquiries should be made regarding borrower(s) /
guarantor(s) /third parties, credentials and antecedents, information about their loans, if
any, availed by them from other branches / banks / institutions etc. from the
neighbourhood including the actual possession/ownership of the property offered as a
security.
• Third party property dealer/seller/builder must be contacted independently to verify
genuineness of their offer / transaction. Credentials of third-party dealer / seller /
builders are to be verified by discreet market enquiries and from other dealer / seller /
builders in the neighbourhood.
• Visit to site of the property proposed to be purchased / mortgaged for physical
verification independently without assistance of borrower/guarantor and make discreet
independent enquiries with neighbour(s).
• The existence of the property mortgaged / to be mortgaged must be verified
independently.
• Full description of the property with boundaries should be on record so as to have proper
identification of the property.
• Verification of the antecedents of the prospective customers as also the genuineness
of the documents submitted as proof of identity, residence, income and employment
should be ensured.
• Physical verification of the properties mortgaged to the Bank must be
meticulously followed in case of all loans.

Forged and Fake Documents

• To eliminate or reduce the cases where the Bank is induced to grant finance on the basis
of forged/fake documents, one of the steps which can be implemented is to direct the Advocate
who gives TIR to procure certified copies of the title deeds and compare the certified copies
with the original documents. The process of comparison of certified copies with the originals
can in a majority of cases, detect the fake or forged nature of documents including encumbrance
certificates and the same is to be followed in all cases.

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• The identity of the borrower should be verified.
• Wherever possible the genuineness of the documents, relating to the property be got
confirmed from the concerned offices/authorities.
• Re-verification of loan documents / securities in respect of loans which have
slipped into NPA within a short period should be carried out to detect any possible
fraud / forgery / fake title deeds.
• Conditional search report about ownership should not be accepted without
compliance with the steps suggested by the Advocate for perfection of title or the gaps.
• The charges created in Bank’s favor on the property should be got noted with the
appropriate authorities immediately after creation of charge/mortgage.
• Details regarding the verification for ensuring the genuineness of the documents are
explained separately in this circular.

Special Precautions.

1. Mortgage by copies of title document

Precautions to be taken in case of mortgage by certified copies for the reason that the original
documents are lost are explained herein.

For creation of equitable mortgage (EM), the original registered Title Documents should
invariably be deposited along with other documents. If the original registered Title Document
has been lost / misplaced and the mortgage is proposed to be created based on certified copy of
the Title Document, the certified copy of the title deed should be accepted only in exceptional
cases where the original is conclusively proved to have been destroyed or lost and after
obtaining prior approval from the controlling authorities. Besides, the Operating Units /
Branches must also follow strictly the undernoted procedure in all such cases.

• The procedure for creation of mortgage in respect of properties where the original
title deeds are lost / misplaced is dealt with in Section C. Mortgages.

Creation of Mortgage by deposit of certified copy of the title deeds is fraught with risk. Cases
where the Original title deeds are not available, should receive more cautious approach.

2. Mortgage by Gift Deed

Whenever any property is taken as security (primary/ collateral) based on gift deed as the
principle title deed, clearance must be obtained from the Law Department. This is in addition
to obtaining TIR from the Panel Advocate as required in the normal course. A suitable
confirmation to this effect must be invariably provided in the credit proposal submitted to the
Sanctioning Authority, as a foot note under Security column. Independent verification/
identification the property and mortgagor must be ensured.

3. Document by Power of Attorney (POA)

Precautions in case the title document of the property is executed through Power of Attorney
are explained herein

A. Legal Position of POA

Legal position in respect of execution of documents by Power of Attorney Holder is as under:

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 • The relationship between the owner of the property and the Power of Attorney holder
is that of a Principal and Agent.
• The Power of Attorney holder acts on behalf of the owner of the property as per the
authority (power) conferred on him by virtue of the power of attorney executed in this
regard. The Power of Attorney may be executed for a specific purpose or for general
purpose.
• All the acts done by the Power of attorney holder in pursuance of the powers conferred
by the deed during the life time of the owner of the property (principal) are valid
and binding on the owner and as per the terms of the power of attorney, the owner is
also duty bound to ratify the same as if is done by him.
• All the acts which are not within the scope of power of attorney executed in this regard
are not valid and binding on the principal (owner) even though the acts are said to be
done on behalf of the owner.
• When a Power of Attorney holder executes a Sale Deed, record shall be had to the
validity of the power of attorney in this regard. So long as the power of attorney is in
force and not revoked, the power of attorney holder can bind the principal i.e., owner.
• The Power of Attorney executed stands automatically revoked on the death of the
principal. As such during the life time of the owner / principal only the power of attorney
holder can act / execute the sale deed on this behalf.
• Any sale deed executed by the Power of attorney holder after the death of the principal
is not valid and binding.
• Even if the Sale Deed is executed by the Power of attorney without the knowledge of
the death of the principal / owner. It is not valid and binding.
• Mere execution of Power of Attorney in favour of a person does not deprive the original
owner of his right to deal with the property independently.
• Notwithstanding the execution of Power of attorney, a principal (owner) can alienate
the property.
• Power of attorney coupled with an interest such as the PoA embedded in a
registered Development Agreement wherein the builder/ developer is also authorized
to sell/execute sale deeds in respect of the flats/ units developed as part of such
Development Agreement stand in a different legal footing from the normal POA. Such
POA coupled with interest is covered under section 202 of the Contract Act and
hence irrevocable and not terminated by the insanity or death of the principal.

B. Precautions in case of title documents executed by POA

Cases where the title document is executed by POA holder, the complexities involved need to
be factored into the TIR obtained from the Bank’s empanelled advocate. Keeping in
view these complexities, the undernoted safeguards are required to be taken care of in
transactions involving POAs, to mitigate against occurrence of frauds.

The power of attorneys are categorized into (i) Builder’s POA and (ii) Common POA for the
purpose of verification of the same in preparation and scrutiny of TIR. Separate procedures are
stipulated in each of the said cases. Further, a third category of (iii) Development Agreement-
cum-Power of Attorney is also explained.

i) Builder’s POA

If the POA is executed by Builders viz. Companies/Firms/Individual or Proprietary Concerns

in favour of their Partners/Employees/ Authorized Representatives to sign Flat Allotment

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Letters, NOCs, Agreements of Sale, Sale Deeds, etc. in favour of buyers of flats/units, the
following instructions while handling the loan proposals, should be complied with:

(a) Where the builder is a company

• Where a particular person or two or more persons have been authorized by way of a
Board Resolution by the Company, a certified copy of the Board Resolution should be obtained
from the Builder Company along with a letter confirming that the Resolution is still in force
and has not been rescinded, modified or withdrawn.
• However in cases, where two or more persons have been authorized by execution of a
Power of Attorney under the Common Seal of the Company, a certified copy of the Power of
Attorney should be obtained along with a confirmation letter that the said Power of Attorney
is still valid in force and has not been revoked or withdrawn.
• The verification/comparing the certified copy with the original Power of Attorney can
be done either by the operational functionaries or by the Advocate issuing the TIR.

(b) Where the builder is a partnership firm

• In case of Partnership firms it is necessary that all the partners execute the Power of
Attorney in favour of the one or more persons who are authorized to sign and execute
Agreement of Sale, Sale deeds, etc. in favour of the purchaser of the flats/units.
Alternatively, one partner can be authorized specifically by the remaining partners to execute
a Power of Attorney on behalf of the firm in favour of one or more persons. This
authorization by the remaining partners in favour of one partner should be specific and in
writing.

• If the Power of Attorney, issued on behalf of the firm, has been executed in compliance
of what is stated above, a certified copy of the same should be verified with the original Power
of Attorney and a confirmation letter should be obtained from the Firm, confirming that the
Power of Attorney is still valid/in force and has not been revoked or withdrawn.

• The verification/comparison of the certified copy with the original Power of Attorney
can be done either by the operational functionaries or by the Advocate issuing the TIR.

(c) Where the Builder is an Individual / Proprietary Concern

• In case of Individuals or Proprietary Concerns whenever a Power of Attorney is

executed in favour of one or more persons, a certified copy of the same should be obtained and
verified with the original Power of Attorney. Further, a letter should be obtained from the
Builder confirming that the Power of Attorney executed in favour of the person/s is still valid
and has not been revoked or withdrawn.
• The verification/comparison of the certified copy with the original Power of Attorney
can be done either by the operational functionaries or by the Advocate issuing the TIR.

ii) Common POA

If the POA is not a Builder’s POA as mentioned above, the following instructions are to be
followed.
(i) Wherever sale of the property is being executed by the POA holder, registration of
POA is mandatory in all cases and the Bank’s Advocate should mention in the TIR that POA
is alive and not revoked by any subsequent registered document.

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(ii) Advocate should verify registered Power of Attorney and to be mentioned in the TIR.
(iii) The advocate should verify the genuineness of Power of Attorney (POA) in all such
cases where sale of the property is being executed by the POA holder.
(iv) Even when power of attorney has been registered, confirmation of the principal should
be obtained that he/she has granted the power of attorney which is still in force and transactions
already entered on the basis of power of attorney are valid and binding on him. It is advisable
to obtain a written confirmation from the Principal confirming the sale.
(v) The documents, submitted for identification of the principal, should be carefully
scrutinized. Every effort should be made to contact the Principal in person by Bank’s dealing
staff for ascertaining the fact that the person who executed the power of attorney is alive or was
alive at the time of execution of document.
(vi) If the Principal is residing in a foreign country, POA holder should submit a copy of the
passport of the principal for photo identification duly attested by the Notary public along with
the proof that the principal is alive.
(vii) A written communication / confirmation from the principal should be obtained
invariably with regard to the power of attorney executed by him/her.
(viii) All Title Investigation Reports (TIR) furnished by the Bank’s empanelled advocate in
respect of PoA sales, shall be vetted by the Bank’s Law Officer for their genuineness and
enforceability. However, in respect of loans upto an amount of Rs.30 Lacs, the vetting by
Bank’s Law officer can be waived subject to the condition that TIR being furnished in respect
of POA transactions is vetted by two empanelled advocates for all centres.
(ix) In the light of the recent Supreme Court Judgment on POAs which ruled that
General Power of Attorney sales together with delivery of possession cannot be treated as a
sale deed conveying the title, necessary precautions need to be taken to avoid lending
against such transactions.
(x) POAs shall be duly registered except in case of NRIs whose POA shall be attested by
Indian Embassy or notarised thereat.
(xi) Verification of chain of POAs is not necessary in respect of properties where:

a. Property is mutated in the name of the present owner ii. All the relevant utility bills are
transferred in the name of the present owner iii. There should not be any dispute / litigation
persisting on the POA relating to the property under consideration.
b. Physical verification of property reports are prepared by officials

(xii) If any payment is to be made to POA holder, the POA must contain the clause that any
payment made to POA holder shall be deemed to have been received by the principal.
(xiii) In respect of builders where sale transactions take place on the basis of POAs for each
project, it is required to obtain confirmation from the principal of the POA each time. DGM
(B&O) is vested with discretion to permit relaxation.

(xiv) Title investigation shall be done based on the original POA only.

(xv) TIR should contain unequivocal opinion on its nature i.e. special POA or general,
enforceability and validity.

(xvi) Ensure that same documents are deposited for mortgage as were scrutinised by
Advocate and Bank’s Law Officer to avoid the risk of duplicates being submitted.
(xvii) Verify whether the POA is executed for carrying out bonafide transaction
of conveying the title to the property.
(xviii) Verify whether the POA executed in this regard is not in lieu of the Conveyance Deed
as stated by the Honourable Supreme Court in its recent judgment.

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(xix) Verify whether the principal/owner acted in his own right and disposed / alienated the
property notwithstanding the execution of POA which act of the Principal will render the POA
infructuous.

iv. Development Agreement cum Power of Attorney

In certain cases the builders enter into Development Agreement-cum-Power of Attorney with
a group of land owners, which is duly registered in the sub- registrar office, and develop a
residential project after getting necessary approvals from different statutory authorities. The
nature of Development Agreement-cum-Power of Attorney is altogether different than the
standalone POA. POAs in such cases are embedded within the Development Agreement and
are usually coupled with some consideration. Normally builders/developers would have either
paid monetary consideration to the land/property owners or have agreed to give them flats or
bungalows as the case may be, in the property to be developed. Such POAs are irrevocable and
applicability of POA does not get affected due to death of the Power of Attorney granter.

In respect of Development Agreement-cum-Power of Attorney, the TIR by the advocate should

specifically state the fact of such registration of the Development Agreement with the
embedded POA therein and that it has created an interest in favour of the builder/developer
and as such is irrevocable as per law. Such TIRs may be obtained in respect of the project as a
whole, from two advocates empanelled with the Bank. In such circumstances, Bank’s
officials contacting the granter of the POA, embedded in such registered agreement, is neither
warranted nor be insisted upon. Also the condition that POA granter is alive and POA has
not been revoked also need not be insisted upon. However, all other safeguards stipulated
above need to be complied in respect of Development Agreement-cum-Power of Attorney.

4. Mortgage of flats/ units in Building/ Development Project for Housing Loans

• To mitigate the risk, Master Search of the proposed project should be carried out by
verification of original title deeds.
• Incorporate Builder’s name along with his Bank’s name and A/C No. on
DD/Banker’s cheque.
• Sale consideration be remitted directly to seller in his account through RTGS/
NEFT.
• While carrying out post sanction inspection, directly ascertain from the
• Builder / Society the genuineness of the document noting Bank’s Lien /
• transfer of share in borrower’s name.
• Noting of Bank’s charge on property in Society record in cases of Housing Loans
to members of Housing Society.
• If there are number of housing loan cases of same type in an area, it should be handed
over to different Advocates/valuers and Branches/CPCs should not rely upon single
Advocate/valuer.
• In case of flats/unit of building, the original title deed(s) of the land on which the
building/project is built on/developed (mother deed) is/are may not be available for
creation of mortgage of individual flat/unit. In such cases in addition to the original title
documents in the name of first allotee/ purchaser of the flat/unit and all the subsequent
title documents, certified copy of mother deed may be deposited for creation of
mortgage. Nevertheless, in such cases, the advocate has to scrutinise the original of the
mother deed. Further, a certificate from the Society/ Flat Owners Association/

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 Builder/Developer need to be obtained to see that no prior charge/ mortgage are created
and existing on the landed property covered by the mother deed.

5. Additional precautions in high value loans

• In respect of all loan proposals, while conducting TIR in respect of property offered
as security, the Advocate has to obtain certified copies of title deeds including minimum
two previous chain title documents and/or all chain title documents executed within
three years from the date of the current title deed directly from the office of the
concerned sub-registrar within whose jurisdiction the property is situated or from the
sub-registrar where the documents are registered and the Advocate has to compare all
the particulars in the original documents with the certified copies so obtained to ensure
that the documents are properly registered and there is no alteration or modification in
the original documents submitted by the borrower / guarantor giving rise to suspicion
of genuineness of the original documents.
• The certified copies so obtained should also be got deposited along with the original
documents while creating the equitable mortgage.
• In respect of all loan proposals above Rs.1.00 crore and above,
• mandatory search of title/ encumbrances for a period of not less than 30 years are to be
made by the panel advocate.
• In respect of loan proposals above Rs.1.00 crore and above, satisfactory
search report from two different panel advocates are to be obtained.

6. Agricultural Land as Security

• Whenever agricultural land is involved, or is offered as a security, the TIR must cover
issues such as necessary permission for non- agricultural use, or creation of mortgage
of agricultural land for non- agricultural advances.
• In agriculture advance, the prospective mortgagor produces khasara and
khatauni/ jamabandi/computerized revenue record as evidence of his title, and if no
other original title deeds are available, a declaration in the form of affidavit should be
obtained explaining loss/absence of title deeds including as to how the borrower/
guarantor became the owner of the property. In such cases, 7/12 extract khasara and
khatauni/land record of the land with all mutation entries should be obtained. Since
7/12 extract/ khasara and khatauni/land record is not a title deed, registered mortgage of
the land should be insisted upon and after creation of mortgage, the mutation to this
effect should be got entered into the revenue record.
• In case of agriculture property proposed for the purpose to secure non-
agricultural advances, the opinion of Bank’s Law Department/ empanelled advocate
should be obtained regarding validity and enforceability.
• In case of registered mortgage of agricultural property, noting of Bank’s charge on
property in revenue record is to be done.
• End use of fund must be ensured Loans Sanctioned based on the security of Agricultural
Property.

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C. Due Diligence and Prevention of Frauds

1. Need for proper due diligence

Proper due diligence of the mortgagor by branch officials is important in ensuring that there is
no fraud in creation of security. The following are certain aspects of due diligence.
• Bank’s extant instructions from time to time in respect of KYC are to be complied in
case of all borrowers/mortgagors/ mortgagors. The copies of KYC documents must be
verified with original copy of identification/address proof by the dealing official under
his signature.
• KYC of the seller / builder / promoter also to be obtained as per laid down
guidelines.
• Branches should conduct thorough due diligence in matters like investigation of title to
the properties / verification of identity of borrower and/ or guarantor and more so, where
the mortgagor is not related to the business/ family of the borrower.
• While accepting the guarantee of an individual, his/her identity and address should
be verified as per KYC guidelines and photograph should be obtained and pasted on the
relevant guarantee agreement, so that cases of impersonation by the guarantors can be
avoided. The photograph of the guarantor has to be affixed on the guarantee
agreement in the space provided, if any, or on the first page of the guarantee agreement.
Apart from the existing procedure of signing the guarantee agreement, the Guarantor
has to additionally sign across the photograph pasted on the Guarantee agreement in
such a way that part of the signature is on guarantee agreement.
• Wherever PAN Card is available it should invariably be verified from CBDT website.
• Due diligence in matters like investigation of title to the properties / verification of
identity of borrowers and/or the guarantors should be followed meticulously.
• Pre-sanction survey which is mandatory plays a vital role and hence needs to be strictly
followed not only in letter but spirit too. It should comprise of the following: a. Visit
to the residence/business place of the borrower /guarantor / third party who has offered
to mortgage the property as a security.
• Discreet independent enquiries should be made regarding borrower(s) /
guarantor(s) / third parties, their credentials and antecedents from the neighbourhood
and also about the possession/ownership etc.
• Third party dealer/supplier/builder must be contacted independently to verify
genuineness of their offer/transaction.
• Visit to site of the property proposed to be purchased / mortgaged for physical
verification must be done independently.

2. Certain shortcomings leading to mortgage frauds.

Certain shortcomings noticed/ observations made in respect of investigation of title leading to

frauds in mortgage are the following:
• Investigation of the title to the properties (offered as security to the Bank) was not
properly done by the Advocates/Solicitors.
• Gross negligence of advocates in the scrutiny of title, particularly in respect of housing
loans.
• Verification of the report of the advocate was not done properly.
• The securities created by the borrowers and /or guarantors turned out to be not
enforceable in the Court of law.

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 • On many occasions, mortgages were created on fake/forged documents of title.
(Certain steps to be followed to ascertain the genuineness of the documents are given
separately in this circular).
• The identity of the borrowers and /or the guarantors was not properly verified and
mortgage by way of deposit of title deeds was created by a fake person who had no
interest in the property..
• The mortgage was created on the basis of certified copies of the title deeds while prior
mortgage was already created on the basis of the original title deeds.
• Third party guarantor who created equitable mortgage of properties of which he had no
title.
• Failure to verify the genuineness of the documents to the title of the property mortgaged
at the time of its acceptance and deferred such verification till the time of initiation of
recovery proceedings.
• Certain unscrupulous builders execute multiple sale deeds/ agreement to sale in respect
of the same flat/unit to different persons which can be avoided by conducting proper
due diligence on the builder, inspection of the property and wherever possible by finding
out the total number of registered documents executed in respect of the entire project
from the office of sub-registrar.
• Lamination of the documents is a highly suspicious circumstance as in some cases
frauds have perpetrated based on the laminated colour copies of the original title deeds.

Questions

1. What are the guidelines for obtaining Encumbrance Certificate? In which scenario, TIR
needs to be repeated after the third year?
2. Can a mortgage be created based on a Certified Copy extracted from the Sub registrar
office if the original title document is lost? If yes, what are the Bank’s guidelines in this regard?

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C. MORTGAGES

Equitable Mortgage

TRANSFER OF PROPERTY ACT, 1882: Sec.58(a) “A mortgage is the transfer of an interest

in specific immoveable property for the purpose of securing the payment of money
advanced or to be advanced by way of loan, an existing or future debt, or the performance of
an engagement which may give rise to pecuniary liability.”
“The transferor is called a mortgagor, the transferee a mortgagee; the principal money and
interest of which payment is secured for the time being are called the mortgage-money, and
the instrument (if any) by which the transfer is effected is called a mortgagedeed.”

Sec 58(f): Mortgage by deposit of title deeds – Where a person in any of the towns notified or
in any other town which the [State Government concerned] may by notification in the Official
Gazette, specify in this behalf, delivers to a creditor or his agent, documents of title to
immoveable property, with intent to create a security thereon, the transaction is called a
mortgage by deposit of title deeds.

Procedure to be followed in Creation of Equitable Mortgage.

Once the TIR is received from the Advocate, the same should be scrutinised as per
checklist given vide Annexure E to circular dated 25th September, 2017.
• Obtain all the title deeds in original from the borrower in the chain of title. Where all
the originals as aforesaid are not available, minimum previous two transactions / sale /
title deeds should be obtained from the borrower along with a declaration
explaining non availability of the original title deeds in respect of past transaction
to the satisfaction of Bank authorities.
• All the original title deeds should be got deposited in the notified area and a
memorandum of entry as per prescribed format should be recorded for the purpose of
creation of mortgage.
• Documents other than partition or family settlement deeds, wherever the documents are
registered in counterparts, all such counterparts available with the mortgagor should be
deposited along with the original documents to avoid misutilisation of such
counterparts.
• For creating Equitable Mortgage of a flat/ independent house by a member of Co-
operative Housing Society, NOC is necessary to ensure that no dues of the society
are outstanding against such member, and a declaration that the society has not created
any prior charge over the property which is subsisting.
• A Search Report/ encumbrance certificate for the intervening period, i.e. from the
date of TIR to the date of deposit of original Title Deeds/ creation of EM should be
obtained and held on record, as part of equitable mortgage documents.
• It is to be ensured that the equitable mortgage confirmation letter by the mortgagor
is received and kept on records.
• Timely execution of Sale Deed in favour of the purchaser/borrower and completion
of equitable mortgage formalities without delay, Bank’s charge on property noted and
possession of the property is taken by the borrower wherever applicable are to be
complied.
• Building Plan approved by the Competent Authority should be obtained and perused
and evidence of Independent Site Verification should be recorded.

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 • A declaration-cum-affidavit should be obtained from the borrower / guarantor / 3rd
party offering his/her/their property as security declaring the following and to be
kept along with mortgage documents.
• He/she/they is/are absolute owner of the property offered as security.
• The title deeds deposited with/handed over to the Bank are original title deeds in their
possession and there is no title deed apart from the deeds deposited with/handed over to
the Bank.
• He/she/they have not created any charge/mortgage or any other encumbrance on the
property offered as security to the Bank.
• He/she/they have not entered into any transaction of any nature whatsoever in respect
of the property offered as security to the Bank.
• There are no circumstances which adversely affect the mortgage and its
validity/enforcement.
• There is no tax liability, utility bills or any other dues pending in respect of the property
offered as security.
• The property offered as security shall be available for the loan sanctioned or to be
sanctioned to the borrower.
• Ensure the payment of stamp duty and registration of equitable mortgage wherever
applicable as per the relevant State laws.
• Ensure the registration of equitable mortgages with the CERSAI under SARFAESI Act
as per the extant instructions in this regard.

(a) EM created based on Certified Copies of Title Deeds, where the Original Title Deeds
are lost, destroyed etc.:

The original title deeds are to the deposited for creation of a valid Equitable Mortgage. In
exceptional cases, where the original title deeds are not available (lost / destroyed / misplaced
etc.) and the Equitable Mortgage is proposed to be created based on the certified copies of title
deeds, extra caution has to be exercised and the following procedure is to be adopted:

• Prior approval from the Controlling Authority to be obtained

• A First Information Report (FIR) is lodged with the Police Authorities in respect of
the lost title deeds. If an FIR has not been recorded by the Police Authorities, a duly
recorded and acknowledged Diary Report (DR), Daily Diary Report (DDR) or a report
recording the fact of lost title deeds filed in any other book with the Police Authorities
(as prescribed by the respective State Government), may be acceptable. The latter (other
than FIR) should be accepted only in such cases and for such reasons as should be
specified in writing by the intending mortgagor in the Affidavit-cum Declaration
(mentioned below), as are acceptable to the Bank. Proof of filing FIR / DR / DDR with
the Police Authorities explaining the circumstances under which the original title deeds
are lost, should be obtained.
• The intending mortgagor should give a public notice in one leading national and in one
regional newspaper stating that the original title deeds have been lost, giving full details
of the properties and further stating the intention to create a charge on the said properties
for securing the loan / credit facility from State Bank of India <<<Branch>>>,
<<<Code>>>
• The fact that an FIR / DR / DDR has been recorded with the Police (Station) has also to
be stated in the public notice.

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 • A duly stamped affidavit-cum-declaration from the mortgagor is to be obtained
declaring that the original title deeds have been lost. The affidavit should also contain
the following details:
• Full Particulars of the properties
• Reference to the FIR / DR / DDR lodged with Police. If FIR was not filed and a DR /
DDR has been recorded, specific reasons for the same to be given
• The details of public notice in national and regional newspapers

Independent verification / identification of the property / mortgagor should be done, as usual.

(b) Equitable Mortgage based on Original Laminated Title Deeds

Laminated original title deeds would also attract greater caution as EM created by deposit of
laminated original title deeds also is fraught with higher risk. The following procedure /
precautions are to be adopted:

i. The intending mortgagor must give a public notice in one leading national and in
one regional newspaper stating:

• Intention to create a charge on the basis of laminated original title deeds

• Complete details of the properties
• That the charge is being created for securing loan / credit facility from State Bank of
India, (Code) / (Branch),
• That in case any party has any claim towards the properties, the same should be
lodged with the intending party and also with the stated branch of SBI, within 15 days
of publication of the notice.

ii. A duly stamped affidavit-cum-declaration of the mortgagor should be taken declaring

that:

• The title deeds in question are the original and the only title deeds of the property
• The same has been laminated (for reasons)
• Full particulars of the property
• Details and copies of public notice stated above
• Details / Copies of any claims / objections received in response to the public notice and
any replies given.

iii. Independent verification and identification of property / mortgagor is to be done,

as usual.

The option of Registered Mortgage may be explored in the above cases and the relative merits
may be advised to controlling office while seeking approval.

3. All the original title deeds should be deposited in a notified area and a Memorandum of
Entry as per prescribed format should be recorded for the purpose of creation of mortgage.

4. Other than partition or family settlement deeds, wherever the documents are registered
in counterparts, all such counterparts available with the mortgagor should be deposited along
with the original documents to avoid mis-utilisation of such counterparts.

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5. For creating Equitable Mortgage of a flat / independent house by a member of Co-
operative Housing Society, No Objection Certificate is necessary to ensure that no dues of the
society are outstanding against such member, and a declaration that the society has not created
any prior charge over the property which is subsisting.

6. A Search Report / (Non) Encumbrance Certificate for the intervening period, i.e., from
the date of TIR to the date of deposit of original Title Deeds / creation of EM should be obtained
and held on record, as part of equitable mortgage documents.
7. Confirmation letter regarding the Equitable Mortgage created by the mortgagor is to be
obtained and kept on records.

8. Timely execution of Sale Deed in favour of the purchaser / borrower and completion of
equitable mortgage formalities to be done without delay. Bank’s charge on the property
should be noted and possession of the property is taken by the borrower wherever applicable
are to be complied.

9. Building Plan approved by the Competent Authority should be obtained and perused
and evidence of Independent Site Verification should be recorded.

10. A declaration-cum-affidavit should be obtained from the borrower / guarantor / 3rd

party offering his / her / their property as security declaring the following and to be kept along
with mortgage documents:

• He / she / they is / are absolute owner of the property offered as security.

• The title deeds deposited with / handed over to the Bank are original title deeds in their
possession and there is no title deed apart from the deeds deposited with/handed over to the
Bank.
• He / she / they have not created any charge / mortgage or any other encumbrance on the
property offered as security to the Bank.
• He / she /they have not entered into any transaction of any nature whatsoever in respect
of the property offered as security to the Bank.
• There are no circumstances which adversely affect the mortgage and its validity /
enforcement.
• There is no tax liability, utility bills or any other dues pending in respect of the property
offered as security.
• The property offered as security shall be available for the loan sanctioned or to be
sanctioned to the borrower.

11 The particulars of the deposit must be recorded in the title deeds register and the entries
must be verified by the Branch Manager/ Divisional Manager and signed by him and also signed
by the two witnesses who may be Bank employees.

12 The mortgagor must not initial / sign / attest the register and/or the Memorandum of
Deposit recorded in the register; as otherwise, the mortgage would be construed as simple
mortgage which may fail for want of stamping and registering.

Further, no writing whatsoever must be taken from the mortgagor(s) at the time of deposit of
the title deeds. However, to safeguard the interest of the Bank, a letter (contents printed in an
Inland Letter) confirming the deposit of the title deeds with intent to create the mortgage in
favour of the Bank as security for the advances should be obtained from the mortgagor(s). This
Inland letter is obtained only subsequent to the deposit of title deeds, say a day or two after the

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mortgage is created. It would be preferable to arrange with the borrower to have this letter
(Inland letter) sent by Registered Post. This letter should be kept along with the title deeds. The
Bank’s date stamp should be affixed on this letter so that there would be no difficulty in proving
later, if the need arises, that the letter was received subsequent to the deposit of the title deeds.

12.1 However, where the mortgagor is a limited company, this confirmatory letter need not
be obtained. This is because in the case of limited companies, the mortgage will be supported
by a resolution passed by the Board of Directors authorizing the company’s representative to
make the deposit of title deeds. Further, the particulars of the mortgage / charge will also be
filed with the Registrar of Companies.

12.2 Particulars like the names of the borrower / guarantor, the date of deposit and the
documents deposited are entered on the left-hand side of the register, while the right-hand side
contains the recital of the deposit and the signatures of the two witnesses. The recital in the
register should be on the lines of the Bank’s standard format that should include a list of the
title deeds deposited as well as a detailed description of the mortgaged property.

14. In case of a simple deposit of title deeds, to further secure an already existing advance,
Standard Documents prescribed should be obtained.

15. When the mortgagor, who has already created an equitable mortgage in favour of the
Bank as security for existing advance, is granted additional / fresh advance sought to be secured
by extension of the existing mortgage, the following procedure should be followed:

• A supplementary recital on the lines of the Bank’s standard format should be recorded
in the title deeds register; and
• Supplementary confirmatory letter should be obtained from the mortgagor
confirming the deposit of title deeds pertaining to the properties made earlier which shall
continue as security for the enhanced / additional / fresh loan granted to the borrower.

16. Ensure the payment of stamp duty and registration of equitable mortgage wherever
applicable as per the relevant State laws.

17. Ensure the registration of equitable mortgages with the CERSAI under SARFAESI
Act, 2002

Questions

1. What is the rationale for obtaining a Non-Encumbrance certificate for the intervening
period between date of TIR and date of creation of EM?
2. A property, on which charge is proposed to be created, is owned by a Company, whether
a confirmation letter is required for creation of EM? What other precautions to be taken in this
regard?
3. Can a laminated original title deed be accepted for a mortgage? If yes, what are the
precautions suggested by the Bank in this regard?

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D. DOCUMENTATION

“C” SERIES DOCUMENTS CPPD/41/22JUL13

C1 - Agreement of Loan for Overall Limit

C2 – Agreement of Hypothecation of Goods & Assets
C3 – Agreement of Pledge of Goods & Assets
C4 – Deed of Guarantee of Overall Limit
C5 – Letter regarding grant of Individual Limits within overall Limits
C6 – Revival Letter
C7 – Deed of English Mortgage for Term Loan
C8 – Deed of further charge for increase in Term Loan
C9 – Memorandum of Deposit for creation of charges for Term Loan / Overall Limit
C10 – Memorandum of Deposit for creation of further charge for Term Loan / Overall Limit
where the initial charge is created by way of mortgage by deposit of title deeds
C11 – Memorandum of deposit for creation of further charge for Term Loan / Overall limit
where the initial charge is created by deed of mortgage

Specification of due date/repayment date

The extant instructions on IRACP norms specify that an amount is to be treated as overdue if
it is not paid on the due date fixed by the bank. It has been observed that due dates for
repayments are sometimes not specifically mentioned in the loan agreements, and instead a
description of due dates is mentioned, leaving scope for different interpretations. Henceforth,
the exact due dates for repayment of a loan, frequency of repayment, breakup between
principal and interest, examples of SMA/NPA classification dates, etc. shall be clearly specified
in the loan agreement and the borrower shall be apprised of the same at the time of loan
sanction and at the time of subsequent changes, if any, to the sanction terms/loan agreement
till full repayment of the loan. In cases of loan facilities with moratorium on payment of
principal and/or interest, the exact date of commencement of repayment shall also be
specified in the loan agreements. These instructions shall be complied with at the earliest. In
case of existing loans, however, compliance to these instructions shall necessarily be ensured
as and when such loans become due for renewal / review.

Accordingly, the arrangement letter to be obtained from the borrowers should include the
following details: -

a) Exact Due Date for Repayment of Loan

b) Frequency of Repayment
c) Break up of Principal and Interest
d) In case of moratorium the exact date of commencement of repayment
e) Examples of SMA / NPA Classification: To be provided for all loans.

Hence, the annexure (as given in below mentioned circular) should be made a part of the
arrangement letter which will be exchanged with the borrower and guarantors whenever there
is any change in the terms and conditions of the credit facilities.

Circular No.: NBG/SMEBU-SMEDOC/66/2021 – 22 Date: Fri 25 Mar 2022

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“C” SERIES SUPPLEMENTAL DOCUMENTS

C1A – Supplemental agreement of loan for increase in overall limit

C2A – Supplemental agreement of Hypothecation of goods and assets for increase in overall
limit
C3A – Supplemental agreement for Pledge of goods and assets for increase in the overall limit
C4A – Supplemental deed of Guarantee for increase in overall Limit

CREATION OF CHARGE: Definition of Charge

• Companies Act, 2013, SEC.21(6)

o An interest or lien created on the property or assets of a company and / or
undertakings as security and includes a mortgage
• Transfer of Property Act, 1882, SEC.100
o Where the immoveable property of one person is by the act of parties or operation
of law made security for the payment of money to another (not a mortgage), the
latter person is said to have a charge on the property

Essential elements of Charge

• There should be two parties, the creator and holder of charge

• The subject matter of charge may be current or future assets / properties
• Intention to offer assets / properties as security for borrowed money / interest manifested
by an agreement with the lender

PRIORITY OF CHARGE

• When the same assets are charged for a second or subsequent times, the question of priority
in respect of the charges in favour of different institutions arise.
• By obtaining consent of the earlier lender(s) for creation of second or subsequent charges
on the same assets, the charges of all lending institutions rank pari passu (on the same
footing)

EXECUTION OF DOCUMENTS

Meaning of execution

'Execution' is defined as the action of executing a plan, order, or a legal instrument. Execution
means the accomplishment of a thing, the completion of an act or instrument. 'Execution’ is the
process of completion or accomplishment of an act. Let us see the meaning of the term
'execution' with regard to the documents in legal sense.

Section 68 of Evidence Act shows that `attestation' and `execution' are two different acts,
one following the other. There can be no valid execution of a document which, under the law,
is required to be attested without the proof of its due attestation and if due attestation is not
proved, the fact of execution is of no avail.

It is a settled legal position that merely admitting signature on the document does not
amount to admission of execution of a document.

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In law, the term 'execution' has not been defined specifically. In normal parlance,
the execution of a document means signing the same. It has been observed that,
execution means signing, sealing and delivery of a document. The term may be defined
as a formal completion of a deed. It is the last act or series of acts which complete it.
It has been held that, the execution of document means that the executant must have signed
or put his thumb impression, only after the contents of the document have been fully stated
and read by the executant before he put his signature thereon. Mere admission of the initial
by the executant would not tantamount to an admission of the document.

In a certain case it was observed that ordinarily, no one is expected to sign a document
without knowing its contents, but if it is pleaded that the party who signed the document
did not know the contents of document then, it may, in certain circumstances, necessary for
the party seeking to prove the document, to place material before the court, to satisfy
it that, the party who signed the document had the knowledge of its contents.

Execution of a document is to be proved by admissible evidence i.e.,

1. Admission, by a signatory to the document, of its execution (Section 58 of Indian

Evidence Act.).
2. Examination of the scribe (Section 67).
3. Examination of an attesting witness (Sections 67 & 68).
4. By proof of signature and handwriting of a person, who is alleged to have signed or
written the document produced (Section 67)
5. By proof of digital signature (Section 67-A).
6. By opinion as to, or comparison of, signature, writing or seal with others admitted
or proved documents. (Section 45)
7. Proof as to verification of digital signature (Sec.73A).

Meaning of attestation

According to section 3 of Transfer of Property Act 1882, term “attested”, in relation to an

instrument, means and shall be deemed always to have meant attested by two or more
witnesses, each of whom has seen the executant sign or affix his mark to the instrument, or has
seen some other person sign the instrument in the presence and by the directions of the
executant, or has received from the executant, a personal acknowledgment of his signature
or mark, or of the signature of such other person, and each of whom has signed the
instrument in the presence of executant; but it shall not be necessary that more than one
of such witnesses shall have been present at the same time, and no particular form of
attestation shall be necessary.

It is essential that the witness should have put his signature “ammo attestandi” i.e., for the
purpose of attesting that he has seen the executant sign or has received from him a personal
acknowledgement of his signature. If a person puts his signature on the document for some
other purpose, e.g to certify that he is scribe or an identifier or a registering officer, he is
not an attesting witness.

The mode of proof of document required to be attested is contained in sections 68 to 71 of

the Evidence Act. Under Section 68, if the execution of document requires to be attested is
to be proved, it will be necessary to call an attesting witness, if alive and subject to the
process of the court and is capable of giving evidence. But in case the document
is registered, then except in the case of a will, it is not necessary to call an attesting witness,

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unless the execution has been specifically denied by the person by whom it purports to
have been executed.

The attester must be independent. A party to an instrument cannot be a valid attesting witness,
as such, party cannot attest its own signature.

Categories of documents requiring compulsory registration

Section 17 of Registration Act, 1908 gives the list of documents requiring compulsory
registration.

(1) The following documents shall be registered, if the property to which they relate is situate
in a district in which, and if they have been executed on or after the date on which, Act
No. XVI of 1864, or the Indian Registration Act, 1866, or the Indian Registration Act,
1871, or the Indian Registration Act, 1887 or this Act came or comes into force, namely :-

a) instruments of gift of immovable property;

b) other non-testamentary instruments which purport or operate to create, declare, assign,

limit or extinguish, whether in present or in future, any right, title or interest, whether vested
or contingent, of the value of one hundred rupees, and upwards, to or in immovable property;

c) non-testamentary instruments which acknowledge the receipt or payment of any

consideration on account of the creation, declaration, assignment, limitation or extinction
of any such right, title or interest; and

d) leases of immovable property from year to year, or for any term exceeding one year, or
reserving a yearly rent;

(e) non-testamentary instruments transferring or assigning any decree or order of a court or

any award when such decree or order or award purports or operates to create, declare,
assign limit or extinguish, whether in present or in future, any right, title or interest, whether
vested or contingent, of the value of one hundred rupees and upwards, to or in immovable
property,

Provided that the State Government may, by order published in the Official Gazette,
exempt from the operation of this sub-section any leases executed in any district, or part
of a district, the terms granted by which do not exceed five years and the annual rent reserved
by which do not exceed fifty rupees.

Sub section 2 gives the list of documents which do not require registration.

Section 17 (1) (1A) : The documents containing contracts to transfer for

consideration, any immovable property for the purpose of section 53-A of the transfer of
Property Act, 1882 shall be registered if they have been executed on or after the
commencement of the registration and other related law (Amendment) Act, 2001, and if
such documents are not registered on or after such commencement then, they shall have
no effect for the purposes of the said Section 53-A.

The documents registrable under the Act fall under three categories. In the first
category, documents relating to transactions which, according to the substantive law,

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can be effected only by registered documents. The Registration Act does not lay down that
any transaction, in order to be valid, must be effected by a registered instrument only. What
it provides is that when there is a written instrument evidencing a transaction, it must, in certain
cases, be registered. Sale deeds, Mortgages, Exchanges, Gifts and Leases under Transfer of
Property Act, 1882 are required to be effected only by registered instruments subject to an
exception in case of some transactions relating to immovable property of less than ₹
100/- in value. Under section 17 of the Registration Act, the list of compulsorily registrable
documents are given.

Second category: Certain transactions can be effected without writing, i.e. partitions,
releases, settlements etc. But, if the transaction is evidenced by a writing and relates
to immovable property, the Registration Act steps in and clauses (b) and (c) of Section 17(1)
of said Act require registration of such documents, subject to the exception specified in
sub-section 2 of that section. If an authority to adopt is conferred in writing, other than a
Will, it is also required to be registered vide section 17(3).

Third category: It is open to the parties, if they so choose, to get certain documents registered
at their option and this is permitted by section 18. ‘Will’ need not be registered but it is open
to the parties to get it registered under the third category.

In a certain case it was held that the agreement for sale cannot be treated as conveyance for the
purpose of Indian Registration Act, 1908. There is no force in contention that agreement for
sale was compulsorily registrable under Clause (b) to sub-section (1) of Section 17 of the
Registration Act.

Purpose of registration of documents

According to section 3 explanation 1 of Transfer of Property Act 1882, where any

transaction relating to immovable property is required by law to be and has been effected
by a registered instrument, any person acquiring such property or any part of, or share or
interest in, such property shall be deemed to be have notice of such instrument as from the date
of registration or, where the property is not all situated in one sub-district, or where the
registered instrument has been registered under sub- section (2) of section 30 of Indian
Registration Act 1908, from the earliest date on which any memorandum of such registered
instrument has been filed by any Sub-Registrar within whose sub- district any part of the
property which is being acquired, or of the property wherein a share or interest is being
acquired, is situated .

The purposes of Registration Act are as follows:

i. To provide information to people, who may deal with property, as to the nature and
extent of the rights which persons may have affecting that property.
ii. To enable people to find out whether any particular piece of property, with which
they may be concerned, has been made subject to some particular legal obligation.
iii. To prevent fraud.
iv. To prevent forgeries and procurement of conveyances, mortgages by fraud or
undue influence.
v. The real purpose of registration is to secure that every person dealing with
property, where such dealings require registration, may rely with confidence
upon the statements contained in the register as full and complete account

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 of all transactions by which his title may be affected, unless indeed he has actual
notice of some unregistered transaction which may be valid apart from registration.

Admissibility of unregistered documents which require compulsory registration

Order XIII Rule 3 of the Code of Civil Procedure provides that, the court may, at any stage
of the suit, reject any document which it considers irrelevant or otherwise inadmissible.

The main provision in section 49 of the Registration Act provides that any document which
is required to be registered, shall not affect any immovable property comprised therein nor
such document shall be received as evidence of any transaction affecting such property.
The proviso would show that an unregistered document affecting immovable
property and required by the Registration Act or the Transfer of Property Act, to be registered
may be received as an evidence to the contract in a suit for specific performance or as
evidence of any collateral transaction. Therefore, an unregistered sale deed of an
immovable property of value of Rs.100/- and more could be admitted in evidence as
evidence of any collateral purpose.

Hon'ble Apex Court, from the principles laid down in the various decisions, culled out
following principles:-

1. A document required to be registered, if unregistered, is not admissible in evidence under

Section 49 of the Registration Act.

2. Such unregistered document can be used as an evidence of collateral purpose as

provided in the Proviso to Section 49 of the Registration Act.

3. A collateral transaction must be independent of, or divisible from, the transaction of

which, the law required registration.

4. A collateral transaction must be a transaction not itself required to be effected by a

registered document, that is, a transaction creating any right, title or interest in
Immovable property of the value of one hundred rupees and upwards.

5. If a document is inadmissible in evidence for want of registration, none of its terms

can be admitted in evidence and that to use a document for the purpose of proving an
important clause would not be using it as a collateral purpose.

Evidentiary value of insufficiently stamped documents

The object of Stamp Act is to collect stamp duty on an instrument which are made chargeable
with duty.

Impound means to keep in custody of the law. Section 33 provides for examination and
impounding of documents. According to said section, every person having by law or consent
of parties authority to receive evidence, and every person in- charge of a public office,
except an officer of police, before whom any instrument, chargeable, in his opinion, with
duty, is produced or comes in the performance in his functions shall, if it appears to him
that such instrument is not duly stamped, impound the same. On impounding and
payment of insufficient stamp with penalty the document can be admitted in evidence.

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The following propositions of law are stated with regard to unstamped or under stamped or
unregistered documents.

a] An unstamped or insufficiently stamped document is inadmissible in evidence;

b] As per proviso to Section 49 of the Registration Act, an unregistered document affecting

immovable property and required to be registered can be received as evidence either in
cases referred to therein or for collateral transaction.

c] An unstamped or insufficiently stamped document coupled with the infirmity of being

unregistered can be received as evidence for a collateral purpose, provided the first defect
under the Stamp Act is corrected. In other words, on unstamped or insufficiently stamped
document, after being duly impounded under the law, can be relied upon for collateral
purpose. However, with reference to Sec. 36 of the Bombay Stamps Act, 1958, it was held
that once the insufficiently stamped document has been admitted in evidence; admission
cannot be called in question at any stage of the same suit or proceeding on the ground
that instrument has not been duly stamped.

Sub-section 1 of section 37 provides that, the court has power to admit the document in
evidence if the party producing the same would pay the stamp duty together with a penalty
as provided by section 34 or duty as provided by section 36. On compliance, it is requisite
to forward a copy of the document along with the amount collected to the Collector. But
if party refuses to pay the aforesaid amount, the court has to impound the document and
forward the same to the Collector as provided under section 37 of said act. On
receipt of the document, it is for the Collector to make inquiry and do the needful.

An unregistered document can be relied upon for collateral purpose i.e., severance of title,
nature of possession of various shares etc., on payment of requisite stamp duty and the
penalty.

However, photocopy of the document, though offered to be impounded with showing readiness
to pay the deficit and penalty, it cannot be termed as an instrument and section 33 of the Stamp
Act cannot be made applicable to the same.

When a document is produced in evidence by plaintiff, objection as to admissibility of

document can be raised when document is tendered in evidence and not after same is
marked as exhibit.

AFFIXING COMMON SEAL

• The Indian Companies Act mandates affixation of the Common Seal on any Power of
Attorney or Certificate of Shares issued. In addition, the MAA may stipulate affixation of
common seal on any document required to be authenticated by the company.
• Indian Companies Act, 2013 made the requirement of having a common seal optional and
allowed Authentication of documents by 2 directors, or by 1 director & Co. Secy.

Accordingly, the legal requirement as advised by the Bank vide Circular CPPD/153/6MAR17,
in cases where the company opts to maintain a common seal and does not opt to maintain a
common seal is as under:

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 a. IN CASE THE COMPANY OPTS TO HAVE A COMMON SEAL
Branches should continue to get the Common seal affixed on all documents as detailed above
authenticated by affixing the common seal.

b. IN CASE THE COMPANY OPTS NOT TO HAVE A COMMON SEAL

i. The company should be advised to amend its Memorandum and Articles of Association to do
away with the common seal and the requirement of affixing of common seal and also indicate
its option i.e., execution of documents either by two directors or by a director and the Company
Secretary.

ii. Thereafter, the documents as detailed above may be allowed to be authenticated as per the
option exercised by the company. Branches should not insist upon affixing of common seal in
such cases.

Income Tax Act– Guidelines for obtaining Prior Permission under Section 281 to create
a charge on the assets of Business

Section 281 of the Income Tax Act, 1961 requires an assessee to obtain the permission of the
assessing officer before creating a charge on or transfer of certain assets, including land,
building, machinery, manufacturing facilities and others.

SECTION 281 OF THE INCOME-TAX ACT, 1961

CERTAIN TRANSFERS TO BE VOID
GUIDELINES FOR PRIOR PERMISSION UNDER SECTION 281 TO CREATE A
CHARGE ON THE ASSETS OF BUSINESS

CIRCULAR NO. 4/2011 [F. NO. 402/69/2010-ITCC], DATED 19-7-2011 by the Central
Board of Direct Taxes (CBDT)

1. The taxpayers should apply in the prescribed form annexed hereto titled “Application
u/s 281 of the IT Act, 1961″ which would be available on the departmental website, as
well as with the Assessing Officers.
2. The taxpayer would have to file the form at least thirty days prior to the proposed date
of transaction.
3. The circumstances under which prior permission u/s 281 should be granted by the
Assessing Officers are as follows:
a. If there is no demand outstanding and there is no likelihood of demand arising in the
next six months, then the permission should be granted.
b. If undisputed demand is outstanding and there is no likelihood of demand arising in
next 6 months, then the taxpayer should pay the same along with interest due thereon
and then permission should be granted.
c. If there is disputed demand outstanding, then the taxpayer should obtain stay for the
same and indemnify the outstanding demand by way of bank guarantee or sufficient
assets or by Department retaining the first charge on the assets proposed to be
transferred or on which such charge is being created, to the extent of such demand.
Thereafter, the permission u/s 281 would be granted by the A.O.
d. If demand is likely to arise in the next six month, then the A.O. should explore the
possibility of action prescribed u/s 281B.

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4. There would be only one level of intervention i.e., at the level of the range head for
granting permission. The cases in which A.O. would require such approval would be
where;
a. value of assets being transferred or on which charge is being created, or
b. the amount of charge being created is Rs. Ten crores or more.
5. The timelines for granting/refusing permission u/s 281 by the A.O. are as follows:
a. If there is no demand outstanding and there is no likelihood of demand arising in the
next six months, then the A.O. should grant the permission within ten working days
of the receipt of the application.
b. If undisputed demand is outstanding and there is no likelihood of demand arising in
next 6 months, then the A.O. should grant permission within ten working days of
payment as in para 3(ii) above.
c. If there is disputed demand outstanding and the taxpayer has obtained stay and
indemnified the demand, then the A.O. should grant the permission within ten
working days of the indemnification of the demand.
d. If demand is likely to arise in the next six months and the A.O. is considering actions
prescribed u/s 281B for the assets excluding the asset under consideration, then the
A.O. should grant the permission within fifteen working days of the receipt of the
application.
e. If the taxpayer does not pay the undisputed outstanding demand or his application
for stay of disputed demand is rejected or he is unable to indemnify the outstanding
demand, the application shall be disposed of within a period of ten working days. In
case the permission is not being granted, a speaking and reasoned order conveying
refusal would be issued with the approval of the Range head within ten working days
of expiry of time given to the taxpayer to pay the undisputed demand or rejection of
his stay application.
6. The validity of the letter granting permission u/s 281 would be:
a. One hundred and eighty days from the date of issue of approval, or
b. Service of order of attachment u/s 281B whichever is earlier.
7. Once the asset is transferred or charge is created, the taxpayer should submit the
documents, in this regard, to the A.O. for his record.

BANK’S INSTRUCTIONS - CPPD/149/14JAN15

In the TIR, if the advocate suggests that No Objection Certificate is required from the Income
Tax department with respect of the property, the following action may be taken:

Category Action required (at the time of initial grant of facilities by the
bank and / or at the time of enhancement of the limits
(wherever mortgage is to be created / extended)
For loans <INR1CR I. A declaration is to be executed by borrower.
(under all segments) and
Per- Segment loans of II. Declaration should also be obtained from the guarantor, in
any amount instances where the guarantor mortgages his / her property
For loans =>INR1CR TIR obtained from the Bank’s empanelled Advocate
(other than Per-Segment to be scrutinised properly to ascertain whether No
loans) Objection Certificate (NOC) under the IT Act is required or not.
a. If NOC is not required:

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 i. Obtain same declaration(s) as above
ii. In addition to obtaining declaration(s), if, in some instances,
it is considered appropriate and necessary, borrower / guarantor
may be advised to submit copies of the assessment orders of the
previous three years and / or a certificate of Statutory Auditor or a
Chartered Accountant about non-pendency of any proceedings
and notice under Second Schedule to the IT Act.
iii. In such cases, reasonable timeline for submission should be
advised, along with the penalty that may be levied in case of delay.

b. If NOC is required:
The borrower should be asked to clear the dues, if any, and then
submit an undertaking/ declaration, that there are no
dues/proceedings pending or contemplated with/by the IT
department, along with a copy of the application for issuance of
NOC, duly acknowledged by the IT authorities. Necessary follow
up should be made to obtain the NOC.

CONSORTIUM DOCUMENTATION

In the case of consortium finance, standardised documents in CF series has been made available.
However, depending on the context, documents may have to be specially drafted, tailor-made
to suit the particular case.

Inter Creditor Agreements, Pari Passu sharing letters, apart from Agreements with Borrower,
Guarantor, Documents for Creation of Security Interest, viz., hypothecation, mortgage or any
other charge assume importance.

It is to be noted that whenever documents (other than Bank prescribed ones) are specially
drafted to suit particular contexts, these have to be invariably vetted by the in-house law team
at the pre-execution stage as well as after the execution of documents. Proof of vetting is to be
retained with the documents.

FLOW CHART FOR DOCUMENTATION

To summarise the activities of documentation (and creation and perfection of charges), the
following activities would suggest a sequential flow:

• Sanction letter – Blank documents that the borrowers / guarantors are required to
execute to be attached with sanction letters / Arrangement Letters
• Acceptance of sanction / documents received from Borrower / Guarantor
• Preparation of documents in fair copies including all facts and figures, properly verified.
Care to be taken to include all terms and conditions (other than standard terms and
conditions) specific to the sanction.
• Pre-execution vetting of documents, by in-house legal team / Law Officer
• Stamping as per relevant Stamp Act / schedule of stamp duty
• Execution of Documents
• Post execution vetting of documents

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 • Registration of charges with MCA (RoC) / CERSAI / Land Registry (Registrar of
Assurances)

E. CREATION & PERFECTION OF CHARGE

Definition of Charge:
• Companies Act, 2013, SEC.21(6)
o An interest or lien created on the property or assets of a company and / or undertakings
as security and includes a mortgage
• Transfer of Property Act, 1882, SEC.100
o Where the immoveable property of one person is by the act of parties or operation of
law made security for the payment of money to another (not a mortgage), the latter person is
said to have a charge on the property

Essential elements of Charge

• There should be two parties, the creator and holder of charge

• The subject matter of charge may be current or future assets / properties
• Intention to offer assets / properties as security for borrowed money / interest manifested
by an agreement with the lender

PRIORITY OF CHARGE

• When the same assets are charged for a second or subsequent times, the question of
priority in respect of the charges in favour of different institutions arise.
• By obtaining consent of the earlier lender(s) for creation of second or subsequent
charges on the same assets, the charges of all lending institutions rank pari passu (on the same
footing)

Income Tax Act– Guidelines for obtaining Prior Permission under Section 281 to create
a charge on the assets of Business

Section 281 of the Income Tax Act, 1961 requires an assessee to obtain the permission of the
assessing officer before creating a charge on or transfer of certain assets, including land,
building, machinery, manufacturing facilities and others.

BANK’S INSTRUCTIONS - CPPD/149/14JAN15

In the TIR, if the advocate suggests that No Objection Certificate is required from the Income
Tax department with respect of the property, the following action may be taken:

For loans <INR1CR (under all segments) and PER Segment loans of any amount
• A declaration is to be executed by borrower.
• Declaration should also be obtained from the guarantor, in instances where the guarantor
mortgages his / her property

For Loans =>INR1CR (other than PER segment loans)

TIR obtained from the Bank’s empanelled Advocate to be scrutinised
properly to ascertain whether No Objection Certificate (NOC) under the IT Act is required
or not.

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• If NOC is not required
i. Obtain same declaration(s) as above
ii. In addition to obtaining declaration(s), if, in some instances, it is considered appropriate
and necessary, borrower / guarantor may be advised to submit copies of the assessment orders
of the previous three years and / or a certificate of Statutory Auditor or a Chartered Accountant
about non-pendency of any proceedings and notice under Second Schedule to the IT Act. iii.
In such cases, reasonable timeline for submission should be advised, along with the penalty that
may be levied in case of delay.
If NOC is required:
The borrower should be asked to clear the dues, if any, and then submit an undertaking/
declaration, that there are no dues/proceedings pending or contemplated with/by the IT
department, along with a copy of the application for issuance of NOC, duly acknowledged by
the IT authorities.

REGISTRATION OF CHARGES WITH REGISTRAR OF COMPANIES (ROC)

TYPES OF CHARGES TO BE REGISTERED (CREATED WITHIN OR OUTSIDE INDIA

ON PROPERTIES WITHIN OR OUTSIDE INDIA)

• Charge on Book Debts, not being pledge on movable property

• Floating charge on the undertaking or any property
• Charge on immoveable property
• Charge on Goodwill, Patent, Trademark, Copy Rights, License…

PURPOSE
• For Creation, Modification or Satisfaction

CHAPTER VI – Companies Act, 2013

Sec.77 Duty to Register Charges etc. –

Instructions prior to amendment vide Gazette Notification dated 31 July 2019
(Amendment dealt with elsewhere in this section)

(1) It shall be the duty of every Co. creating a charge within or outside India, on its property or
assets or any of its undertakings, whether tangible or otherwise and situated in or outside India,
to register the particulars of the charge signed by the Co. & the charge holder together with the
instruments, if any, creating such charge in such form, on payment of such fees and in such
manner as may be prescribed, with the Registrar within 30D of its creation. The Registrar may,
on an application by the company, allow such registration to be made within a period of 300D
of such creation on payment of such additional fees as may be prescribed. If registration is not
made within 300D of such creation, the Co. shall seek extension of time in accordance with
Sec.87. Any subsequent registration of charge shall not prejudice any right acquired in respect
of any property before the charge is actually registered.

Sec. 87. Rectification by Central Government in register of charges.

(1) The Central Government on being satisfied that—

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• the omission to file with the Registrar the particulars of any charge created by a
company or any charge subject to which any property has been acquired by a company or any
modification of such charge; or
• the omission to register any charge within the time required under this Chapter or the
omission to give intimation to the Registrar of the payment or the satisfaction of a charge, within
the time required under this Chapter; or
• the omission or mis-statement of any particular with respect to any such charge or
modification or with respect to any memorandum of satisfaction or other entry made in
pursuance of section 82 or section 83, accidental or due to inadvertence or some other sufficient
cause or it is not of a nature to prejudice the position of creditors or shareholders of the
company; or
• On any other grounds, it is just and equitable to grant relief,

may on the application of the company or any person interested and on such terms and
conditions as it may seem to the Central Government just and expedient, direct that the time for
the filing of the particulars or for the registration of the charge or for the giving of intimation
of payment or satisfaction shall be extended or, as the case may require, that the omission or
mis-statement shall be rectified.

(2) Where the Central Government extends the time for the registration of a charge, the order
shall not prejudice any rights acquired in respect of the property concerned, before the charge
is actually registered.

REGN. OF CHARGE (AMENDMENT to SEC.77)

GAZETTE OF INDIA EXTRAORDINARY NEW DELHI, WEDNESDAY, JULY 31,
2019/SHRAVANA 9, 1941 (SAKA)

In section 77 of the principal Act, in sub-section (1), for the first and second provisos, the
following provisos shall be substituted, namely:—

“Provided that the Registrar may, on an application by the company, allow such registration to
be made––
(a) in case of charges created before the commencement of the Companies (Amendment)
Act, 2019, within a period of 300D of such creation; or
(b) in case of charges created on or after the commencement of the Companies
(Amendment) Act, 2019, within a period of 60D of such creation, on payment of such additional
fees as may be prescribed:

Provided further that if the registration is not made within the period specified—
(a) in clause (a) to the first proviso, the registration of the charge shall be made within 6M
from the date of commencement of the Companies (Amendment) Act, 2019, on payment of
such additional fees as may be prescribed and different fees may be prescribed for different
classes of companies;

(b) in clause (b) to the first proviso, the Registrar may, on an application, allow such
registration to be made within a further period of 60D after payment of such ad valorem fees as
may be prescribed.”.

TIME LIMIT FOR REGISTRATION OF CHARGES WITH ROC

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 Earlier provision of Companies Act, for New Provision of Companies
Comparison registration of Charge Act, for registration of Charge
Charge is created before commencement of the Charge is created on or after
Companies (Amendment) Ordinance, 2018, commencement of the
i.e., 2 Nov. 18 Companies (Amendment)
Particular Fee Ordinance, 2018, i.e., 2 Nov. 18
Normal Fee Within 30 days from the date of creation Within 60 Days
Additional Within 270 days after expiry of 30 days from
Fee the date of creation NA
Advalorem After expiry of 300 days from the date Within 60 days after expiry of 60
Fees days from the date of creation

Types of Charges to be Registered

1. A charge on book Debts of Company

2. A charge not being pledge, on any movable property of the Company
3. A floating charge on the undertaking or any property of the Company
4. A charge on any immovable property
5. A charge on Goodwill, Patent, Trade mark, copy right, License etc

Purpose
1. For Creation of Charge
2. Modification of Charge
3. Satisfaction of Charge

Periodicity of Search
Pre-Sanction stage
1. At the time of filing Bank`s charge with ROC after documentation / disbursement
2. At every Review / Renewal stage and position should be commented in the proposal
3. For Stressed accounts search should be done at enhanced frequency, as deemed
necessary.

Exemptions
1. Pledge Advances (However filing is advisable under the head “Others”)
2. Corporate Guarantee
3. However if a company creates charge on any of its assets for performance of the
guarantee obligation under Corporate Guarantee, then charge is required to be filed.

Types of forms:
There are eleven types of forms being used for different purposes

Sl. Form Purpose of Form

No. Number
1 CHG 1 Application for registration of creation, modification of charge (other than
those related to debentures)
2 CHG 2 Certificate of Registration of charge issued by the Registrar
3 CHG 3 Certificate of Modification of charge issued by the Registrar

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4 CHG 4 For filing Satisfaction of charge
5 CHG 5 Certificate o f r e g i s t r a t i o n of Satisfaction of charge issued by the
Registrar
6 CHG 6 For Intimation of appointment of Receiver or Manager
7 CHG 7 Company’s register of charges
8 CHG 8 Application to Central Government for extension of time for filing particulars
of registration of creation / modification / satisfaction of charge OR for
rectification of omission or misstatement of any particular in respect of
creation/ modification/ satisfaction of charge
9 CHG 9 Application for registration of creation or modification of charge for
debentures or rectification of particulars filed in respect of creation or
modification of charge for debentures

CONSEQUENCES OF NON-REGISTRATION OF CHARGE

According to Sec.77 of Companies Act all types of charges are to be registered with ROC; If
not, it would be:

Void against the Liquidator

The liquidator on winding up of the company can ignore the charge (creditor becomes
unsecured)

Void against Creditor

If any subsequent charge is created on the same property, the earlier charge would have no
consequence.

Questions:

1. Is Common Seal mandatory in Company documentation? Explain the Bank’s

guidelines in this regard?
2. What precautions should be taken while obtaining letter of Confirmation as part of
creation of Equitable Mortgage?
3. What points should be kept in mind while stamping of loan documents?

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CENTRAL REGISTRY FOR SECURITIZATION, ASSET RECONSTRUCTION
& SECURITY INTEREST OF INDIA (CERSAI)

Central Registry of Securitization Asset Reconstruction and Security Interest of India is a

Government of India Company licensed under section 8 of the Companies Act, 2013 with Govt.
of India having a shareholding of 51% and select Public Sector Banks and the National Housing
Bank also being shareholders of the Company.

A Govt. initiative, U/s 20(1) of SARFAESI Act, 2002 and U/s 25 of Companies Act, 2013

The object of the Company is to maintain and operate a Registration System for registration of
transactions of securitization, asset reconstruction of financial assets and creation of security
interest over property, as contemplated under the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). CERSAI is providing
the platform for filing registrations of transactions of securitisation, asset reconstruction and
security interest by the Banks and Financial Institutions. The portal provides facility to file
security interest in immovable created through all types of mortgages and in units under
constructions and filing of Security Interests in movables, intangibles and factoring
transactions.

More than a statutory obligation CERSAI is a risk mitigation tool for the Banks / Housing
Finance companies, FIs and public at large to prevent multiple financing against the same
property.

Online search is available to public to enable them to search and inspect the records maintained
by the Registry on payment of fees prescribed under the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011. The
search can be made based on both Asset details as well as Debtor's details.

VERIFICATION OF RECORDS OF CENTRAL REGISTRY

Before creation of any mortgage the branches should verify the records of the CERSAI
(www.cersai.org.in) to see that there is no pre-existing charge registered with Central Registry.
Such exercise is also to be conducted at the time of renewal/ sanction of additional limits. A
copy of the screen shot of search report / search report of CERSAI to be attached with the loan
proposal and subsequently preserved with the security documents.

REGISTRATION OF CHARGES WITH CERSAI

Immediately after creation of mortgages, the security interest should be registered with the
Central Registry.

The Central Government has notified amendments to the Securitization and Reconstruction of
Financial Assets and Enforcements of Security Interests (Central Registry) Rules, 2011 vide
gazette notification dated January 22, 2016.

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TYPES OF SECURITY INTEREST TO BE FILED

Creation, Modification or Satisfaction of:

• Mortgages by deposit of title deeds

• Immoveable property by mortgage other than deposit of title deeds
• Hypothecation of P&M, Stocks, Debts including book debts or receivables whether
existing or future
• Intangible Assets, being knowhow, patent, copyright, trade-mark, license, franchise or
any other business or commercial right of similar nature
• Any under-construction residential or commercial building or a part thereof by an
agreement or instrument other than by mortgage

SECTIONS 17 TO 19 OF SARFAESI ACT, 2002

Government of India vide Gazette Notification No.4133 dated 26-12-2019 has appointed
24-01-2020 as the date on which the provisions of Section 17 to 19 (both inclusive) of
SARFAESI Act shall come into force. Brief details of Section 17 to 19 are as under:

a) Section 17: In the earlier provision, the words “within thirty days after the date of such
transaction or creation of security, by the securitization company or reconstruction company or
the secured creditor, as the case may be” shall be omitted.

(b) Section 18: “Chapter IV A” (Registration by Secured Creditor and other Creditors) shall
be inserted from 24-01-2020. The brief details of Chapter IV A are as under:

26-B (1): The provisions of Chapter IV A relating to Central Registry will be extended to all
Creditors other than Secured Creditors as defined in clause (zd) of sub-section (1) of section
2, for creation, modification or satisfaction of any Security Interest over any property of the
borrower for the purpose of securing due repayment of any financial assistance granted
by such creditor to the borrower.

26-B (2): Any Creditor including the Secured Creditor may file particulars of transactions of
creation, modification or satisfaction of any Security Interest with Central Registry in such
form and manner as prescribed.
B(3): A Creditor other than Secured Creditor filing particulars of transactions of creation,
modification and satisfaction of Security Interest over properties created in its favor shall not
be able to exercise any right of enforcement of Securities under SARFAESI act.

26–B(4): Central Government / State Government / Local Authority, entrusted with the
function of recovery of tax or other Government dues and for issuing any order for attachment
of any property of any person liable to pay the tax or Government dues, shall file with
the Central Registry such attachment order with particulars of assesse and details of tax or
other Government dues.

26-B (5): If any person having any claim against any borrower obtains an order or an
attachment for the property from any court or any authority empowered to issue such orders,
such person may file particulars of such attachments with Central Registry.

26-C (1): The registration in Central Registry shall be deemed to constitute a ‘public notice’.

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26-C (2) : On registration of Security Interest / attachment orders with Central Registry by
Secured Creditors/ other Creditors, the claim of such Secured Creditors and other Creditor
shall have priority over any subsequent Security Interest created upon such property.

The “priority” shall be with the secured creditor, who has registered his security interest with
CERSAI first, notwithstanding the prior ‘creation’ of the security interest. ii) Registration of
the relevant security interest with CERSAI by one of the banks shall be prior in time (even if
the same is happening on the same date) and in such a scenario, the bank holding such prior
registration will have the priority, as regards his ‘security interest’.

26- D: No secured creditor will be entitled to exercise the rights of enforcement of

securities available to it under by the SARFAESI Act, unless the security interest created in
its favor by the borrower, has been registered with CERSAI.

26-E: The debt due to any Secured Creditor shall be paid in priority over all other debts /
revenues / Taxes / Cesses and other rates payable to the Central Government or State
Government or local authority.

For the purposes of this section, it is has been clarified that on or after the commencement of
the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy
proceedings are pending in respect of secured assets of the borrower, priority to secured
creditors in payment of debt shall be subject to the provisions of that code.

Section 19: Penalty provisions for default in filing, modifying and satisfaction of security
interest, shall be omitted w.e.f. 24-01-2020.

REGISTRATION OF SECURITY INTEREST ON VEHICLES

Circular R&DB/CERSAI/85/30OCT19

Government of India vide Gazette Notification dated 3MAY19 has identified 3MAY19 as the
date of integration of the registration system of Central Registry with the VAHAN National
Register, the registration system of the Motor Vehicles Act,1988.

Accordingly, CERSAI has advised all the Banks to file transactions relating to Security
Interest on Vehicles with VAHAN National Register only.

Clarification by GOI through RBI Letter No. DBR.CO.Leg.No.2781/09.08.020/2019-20 dated

4 OCT19 that any vehicle registered with VAHAN registry shall be deemed to be registered
with CERSAI for the purposes of SARFAESI Act, 2002.

New version of registration system w.e.f. 03/08/2020

Central Registry will be releasing an upgraded version of registration system (CERSAI 2.0)
w.e.f. 03/08/2020. As of now, CERSAI registration process was based on Maker/Checker
mechanism. In the new version of registration system, Maker/Checker concept will be
discontinued. Besides an offline functionality is added as a new feature

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The access and functioning of new version of CERSAI system is as under:

Existing Version New Version (CERSAI 2.0) w.e.f.

03/08/2020
Availability of Maker / Checker mechanism Discontinuation of Maker / Checker
mechanism Any existing user with valid
Maker- store data on the Registration System Digital Signature (DS) of any Class will be
for the final submission by an Authorised able to access CERSAI 2.0 after changing the
users (Not require Digital Certificates) default password and perform end to end
transaction as there is no

Maker - Checker concept in CERSAI 2.0 .

Checker- Authorised user finally submit the
Registration data / batch files to the CERSAI Further, Existing Users after expiry of their
Registration System. (Requires Digital current DS as well as New Users registered
Certificate with Token) in CERSAI 2.0 will necessarily have to
procure Class III DS.

Questions:
1. What types of charges are required to be registered before ROC?
2. If charge is not filed with the ROC within 60 days of creation of charge, in what ways lending
bank may be affected?
3. What is the objective of setting up of CERSAI?
4. What are the types of charges that are required to be registered with CERSAI?

F. VALUATION OF ASSETS

The following is the gist of the guidelines on valuation of assets:

(Circular SARG/POLICY/11/2021 - 22: Date: 9 Sep 2021)
Old Circular: CCO/CPPD- ADV/85/2018-19 dt 1st October, 2018 & CCO/CPPD-ADV/101/2019-20
dated 1.10.2019)

1. Compliance of Standards and Procedures/Methodologies

i) All valuers empanelled with the Bank shall comply and abide by the standards and
procedures laid down in the Policy. Valuers shall undertake compliance of the Code of Conduct
at the time of empanelment.

ii) While conducting a valuation, valuers have to comply with Internationally Accepted
Valuation Standards (IVS) as applicable to the respective class of asset and respective method
of valuation as required. The brief background of IVS is as follows:

The International Valuation Standards (IVS) are standards for undertaking valuation
assignments using generally recognised concepts and principles that promote transparency and
consistency in valuation practice. The International Valuation Standards Council (IVSC) is an
independent, not-for-profit organization committed to advancing quality in the valuation
profession and formation of IVS. Their primary objective is to build confidence and public trust

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in valuation by producing standards and securing their universal adoption and implementation
for the valuation of assets across the world. Valuations are widely used and relied upon in
financial and other markets, whether for inclusion in financial statements, for regulatory
compliance or to support secured lending and transactional activity. The IVSC also promotes
leading practice approaches for the conduct and competency of professional valuers.

iii) The IVSC Standards Board is the body responsible for setting the IVS. The Board has
autonomy in the development of its agenda and approval of its publications. In developing the
IVS, the Board:
a. follows established due process in the development of any new standard, including
consultation with stakeholders (valuers, users of valuation services, regulators, valuation
professional organisations, etc.) and public exposure of all new standards or material alterations
to existing standards,
b. liaises with other bodies that have a standard-setting function in the financial markets,
c. conducts outreach activities including round-table discussions with invited constituents and
targeted discussions with specific users or user groups. The objective of the IVS is to increase
the confidence and trust of users of valuation services by establishing transparent and consistent
valuation practices. A standard will do one or more of the following:
d. identify or develop globally accepted principles and definitions,
e. identify and promulgate considerations for the undertaking of valuation assignments and
the reporting of valuations,
f. identify specific matters that require consideration and methods commonly used for valuing
different types of assets or liabilities.

iv) The IVS consist of mandatory requirements that must be followed in order to state that a
valuation was performed in compliance with the IVS. Certain aspects of the standards do not
direct or mandate any particular course of action, but provide fundamental principles and
concepts that must be considered in undertaking a valuation. The IVS are arranged as follows:
a. The IVS Framework -This serves as a preamble to the IVS. The IVS Framework consists of
general principles for valuers following the IVS regarding objectivity, judgement, competence
and acceptable departures from the IVS.
b. IVS General Standards - These set forth requirements for the conduct of all valuation
assignments including establishing the terms of a valuation engagement, bases of value,
valuation approaches and methods, and reporting. They are designed to be applicable to
valuations of all types of assets and for any valuation purpose.

c. IVS Asset Standards - The Asset Standards include requirements related to specific types of
assets. These requirements must be followed in conjunction with the General Standards when
performing a valuation of a specific asset type. The Asset Standards include certain background
information on the characteristics of each asset type that influence value and additional asset-
specific requirements on common valuation approaches and methods used.

v) The comprehensive document on international valuation standard is available on the IVSC

website at www.ivsc.org.

vi) It is expected that every empanelled valuer are made aware of the IVS guidelines and
adherence to the same is done by valuer in valuation process. A declaration to the same has
been incorporated in Annexure IV.

vii) Valuer associations viz. Institution of Estate Managers & Appraisers (IESMA), The Indian
institute of Valuers (IIV), etc., who are not members of International Valuation Standards

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Council (IVSC) at present shall be advised to become the member of IVSC and status in this
regard to be invariably commented upon in the annual review of the valuers.

2. VALUATION APPROACHES AND METHODS

• The three approaches described and defined below are the main approaches used in valuation
as per IVS. They are all based on the economic principles of price equilibrium, anticipation of
benefits or substitution. Consideration must be given to the relevant and most appropriate
valuation approaches. The principal valuation approaches are:

1. Market Approach,
2. Income Approach, and
3. Cost Approach

• Each of these valuation approaches includes different, detailed methods of application.

• The goal in selecting valuation approaches and methods for an asset is to find the most
appropriate method under the particular circumstances. No one method is suitable in every
possible situation. The selection process should consider, at a minimum:

a) the appropriate basis(es) of value and premise(s) of value, determined by the terms and
purpose of the valuation assignment,

b) the respective strengths and weaknesses of the possible valuation approaches and methods,

c) the appropriateness of each method in view of the nature of the asset, and the approaches or
methods used by participants in the relevant market, and

d) Reliable information.

• Valuers should consider the use of multiple approaches and method and more than one
valuation approach or method should be considered and may be used to arrive at an indication
of value, particularly when there are insufficient factual or observable inputs for a single method
to produce a reliable conclusion. Where more than one approach and method is used, or even
multiple methods within a single approach, the conclusion of value based on those multiple
approaches and/or methods should be reasonable and process of analysing and reconciling the
differing values into a single conclusion, without averaging, should be described by the valuer
in the report.

2.1 Market Approach

• This approach provides an indication of value by comparing the asset with identical or
comparable (that is similar) assets for which price information is available.
• The market approach should be applied and afforded significant weight under the following
circumstances:

a) the subject asset has recently been sold in a transaction appropriate for consideration under
the basis of value,

b) the subject asset or substantially similar assets are actively publicly traded, and/or

c) there are frequent and/or recent observable transactions in substantially similar assets.

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• The additional circumstances where the market approach may be applied and afforded
significant weight:

a) Transactions involving the subject asset or substantially similar assets are not recent enough
considering the levels of volatility and activity in the market.

b) The asset or substantially similar assets are publicly traded, but not actively.

c) Information on market transactions is available, but the comparable assets have significant
differences to the subject asset, potentially requiring subjective adjustments.

d) Information on recent transactions is not reliable (hearsay, missing information, synergistic

purchaser, not arm’s-length, distressed sale, etc).

e) The critical element affecting the value of the asset is the price it would achieve in the market
rather than the cost of reproduction or its income producing ability.

• Even in circumstances where the market approach is not used, the use of market based inputs
should be maximized in the application of other approaches (such as, market-based valuation
metrics such as effective yields and rates of return).
• When comparable market information does not relate to the exact or substantially the same
asset, the valuer must perform a comparative analysis of qualitative similarities and differences
between the comparable assets and subject asset. It will often be necessary to make adjustments
based on this comparative analysis. Those adjustments must be reasonable and valuers must
document the reasons for the adjustments and how they were quantified.

• This approach uses market multiples derived from a set of comparable, each with different
multiples. The selection of the appropriate multiple within the range requires judgement,
considering qualitative and quantitative factors.

2.1.1 Market Approach Methods

• The method used under this approach is Comparable Transactions Method. This method is
also known as the guideline transactions method. It utilizes information on transactions
involving assets that are the same or similar to the subject asset to arrive at an indication of
value.

• The comparable transaction method can use a variety of different comparable evidence, also
known as units of comparison, which form the basis of the comparison. For example, a few of
the many common units of comparison used for real property interests include price per square
foot (or per square metre), rent per square foot (or per square metre) and capitalization rates. A
few of the many common units of comparison used in business valuation include EBITDA
(Earnings Before Interest, Tax, Depreciation and Amortisation) multiples, earnings multiples,
revenue multiples and book value multiples. A few of the many common units of comparison
used in financial instrument valuation include metrics such as yields and interest rate spreads.

• The units of comparison used by participants can differ between asset classes and
across industries and geographies.

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• The key steps in the comparable transactions method are:

a) Identify the units of comparison that are used by participants in the relevant market,
b) Identify the relevant comparable transactions and calculate the key valuation metrics for
those transactions,
c) Perform a consistent comparative analysis of qualitative and quantitative similarities and
differences between the comparable assets and the subject asset,
d) Make necessary adjustments, if any, to the valuation metrics to reflect differences between
the subject asset and the comparable assets,
e) Apply the adjusted valuation metrics to the subject asset, and
f) If multiple valuation metrics were used, reconcile the indications of value.

• A valuer should choose comparable transactions within the following context:

a) Evidence of several transactions is generally preferable to a single transaction or event,

b) Evidence from transactions of very similar assets (ideally identical) provides a better
indication of value than assets where the transaction prices require significant adjustments,
c) Transactions that happen closer to the valuation date are more representative of the market
at that date than older/dated transactions, particularly in volatile markets,
d) For most bases of value, the transactions should be “arm’s length” between unrelated parties,
e) Sufficient information on the transaction should be available to allow the valuer to develop
a reasonable understanding of the comparable asset and assess the valuation
metrics/comparable evidence,
f) Information on the comparable transactions should be from a reliable and trusted source, and
g) Actual transactions provide better valuation evidence than intended transactions.

• A valuer should analyze and make adjustments for any material differences between the
comparable transactions and the subject asset. Examples of common differences that could
warrant adjustments may include, but are not limited to:

a) Material characteristics (age, size, specifications, etc.),

b) Relevant restrictions on either the subject asset or the comparable assets,
c) Geographical location (location of the asset and/or location of where the asset is likely to be
transacted/used) and the related economic and regulatory environments,
d) Profitability or profit-making capability of the assets,
e) Historical and expected growth,
f) Yields/coupon rates,
g) Types of collateral,
h) Unusual terms in the comparable transactions,
i) Differences related to marketability and control characteristics of the comparable and the
subject asset, and
j) Ownership characteristics (such as legal form of ownership, amount percentage held).

• This method utilises information on publicly-traded comparable that is the same or similar to
the subject asset to arrive at an indication of value.
• Difference between Comparable transaction method and guideline publicly-traded
comparable method:
a) The valuation metrics/comparable evidence are available as of the valuation date,
b) Detailed information on the comparable are readily available in public filings, and
c) The information contained in public filings is prepared under well understood accounting
standards.

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• The method should be used only when the subject asset is sufficiently similar to the publicly-
traded comparable to allow for meaningful comparison.
• The key steps in the guideline publicly-traded comparable method are to:

a) Identify the valuation metrics/comparable evidence that are used by participants in the
relevant market,
b) Identify the relevant guideline publicly-traded comparable and calculate the key valuation
metrics for those transactions,
c) Perform a consistent comparative analysis of qualitative and quantitative similarities and
differences between the publicly-traded comparable and the subject asset,
d) Make necessary adjustments, if any, to the valuation metrics to reflect differences between
the subject asset and the publicly-traded comparable,
e) Apply the adjusted valuation metrics to the subject asset, and
f) If multiple valuation metrics were used, weight the indications of value.

• A valuer should choose publicly-traded comparable within the following context:

a) Consideration of multiple publicly-traded comparable is preferred to the use of a single

comparable,
b) evidence from similar publicly-traded comparable (for example, with similar market
segment, geographic area, size in revenue and/or assets, growth rates, profit margins, leverage,
liquidity and diversification) provides a better indication of value than comparable that require
significant adjustments, and
c) Securities that are actively traded provide more meaningful evidence than thinly traded
securities.

• A valuer should analyze and make adjustments for any material differences between
the guideline publicly-traded comparable and the subject asset.

Examples of common differences that could warrant adjustments may include, but are not
limited to:

a) Material characteristics (age, size, specifications, etc.),

b) Relevant discounts and premiums,
c) Relevant restrictions on either the subject asset or the comparable assets,
d) Geographical location of the underlying company and the related economic
and regulatory environments,
e) Profitability or profit-making capability of the assets,
f) Historical and expected growth,
g) Differences related to marketability and control characteristics of the comparable and
the subject asset, and
h) Type of ownership.

2.1.2 Other Market Approach Considerations

The following are the non-exhaustive list of certain special considerations that may form part
of a market approach valuation:
i) Anecdotal or “rule-of-thumb” valuation benchmarks are sometimes considered to be
a market approach.
ii) Adjust for differences between the subject asset and the guideline transactions or
publicly-traded securities.

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iii) Some of the most common adjustments made in the market approach are known as discounts
and premiums.

2.2 Income Approach

• Under the income approach, the value of an asset is determined by reference to the value
of income, cash flow or cost savings generated by the asset.
• The income approach should be applied and afforded significant weight under the
following circumstances:
a. The income-producing ability of the asset is the critical element affecting value
b. Value from a participant perspective, and/or reasonable projections of the amount and timing
of future income are available for the subject asset, but there are few, if any, relevant market
comparable.

• Additional circumstances where the income approach may be applied and afforded
significant weight:
a) The income-producing ability of the subject asset is only one of several factors affecting
value from a participant perspective,
b) There is significant uncertainty regarding the amount and timing of future income-related to
the subject asset,
c) There is a lack of access to information related to the subject asset (for example, a minority
owner may have access to historical financial statements but not forecasts/budgets), and/or
d) The subject asset has not yet begun generating income, but is projected to do so.

2.2.1 Income Approach Methods

• Methods under the income approach are effectively based on the discounting future
amounts of cash flow to present value.

2.2.1.1 Discounted Cash Flow (DCF) Method

Under the DCF method, the forecasted cash flow is discounted back to the valuation date,
resulting in a present value of the asset.
i. The key steps in the DCF method are:

a) Choose the most appropriate type of cash flow for the nature of the subject asset and the
assignment (i.e., pre-tax or post-tax, total cash flows or cash flows to equity, real or nominal,
etc.),
b) Determine the most appropriate explicit period, if any, over which the cash flow will be
forecast,
c) Prepare cash flow forecasts for that period,
d) Determine whether a terminal value is appropriate for the subject asset at the end of the
explicit forecast period (if any) and then determine the appropriate terminal value for the nature
of the asset,
e) Determine the appropriate discount rate, and
f) Apply the discount rate to the forecasted future cash flow, including the terminal value, if
any.

ii. Type of Cash Flow:

a) Cash flow to whole asset or partial interest
b) The cash flow can be pre-tax or post-tax
c) Nominal versus real

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d) Currency

iii. Explicit Forecast Period: Valuers should consider the following factors when selecting
the explicit forecast period:
a) The life of the asset,
b) A reasonable period for which reliable data is available on which to base the projections,
c) The minimum explicit forecast period which should be sufficient for an asset to achieve a
stabilised level of growth and profits, after which a terminal value can be used,
d) In the valuation of cyclical assets, the explicit forecast period should generally include an
entire cycle, when possible, and
e) For finite-lived assets such as most financial instruments, the cash flows will typically be
forecast over the full life of the asset.

iv. Cash Flow Forecasts: the projected cash flow will reflect one of the following:
a) Contractual or promised cash flow,
b) The single most likely set of cash flow,
c) The probability-weighted expected cash flow, or d) Multiple scenarios of possible future cash
flow.

v. Terminal Value: The terminal value should consider:

a) Whether the asset is deteriorating/finite-lived in nature or indefinite-lived, as this will
influence the method used to calculate a terminal value,
b) Whether there is future growth potential for the asset beyond the explicit forecast period,
c) Whether there is a pre-determined fixed capital amount expected to be received at the end
of the explicit forecast period,
d) The expected risk level of the asset at the time the terminal value is calculated,
e) For cyclical assets, the terminal value should consider the cyclical nature of the asset and
should not be performed in a way that assumes “peak” or “trough” levels of cash flows in
perpetuity, and
f) The tax attributes inherent in the asset at the end of the explicit forecast period (if any) and
whether those tax attributes would be expected to continue into perpetuity.

vi. Valuers may apply any reasonable method for calculating a terminal value. The three most
commonly used methods for calculating a terminal value are:
a) Gordon growth model/constant growth model (appropriate only for indefinite- lived assets),
b) Market approach/exit value (appropriate for both deteriorating/finite-lived assets and
indefinite-lived assets), and
c) Salvage value/disposal cost (appropriate only for deteriorating/finite-lived assets).

vii. Discount Rate:

a) The capital asset pricing model (CAPM),
b) The weighted average cost of capital (WACC)
c) The observed or inferred rates/yields,
d) The internal rate of return (IRR),
e) The weighted average return on assets (WARA), and
f) The build-up method (generally used only in the absence of market inputs).

viii. In developing a discount rate, a valuer should consider:

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a) The risk associated with the projections made in the cash flow used,
b) The type of asset being valued. For example, discount rates used in valuing debt would be
different to those used when valuing real property or a business,
c) The rates implicit in transactions in the market,
d) The geographic location of the asset and/or the location of the markets in which it would
trade,
e) The life/term of the asset and the consistency of inputs. For example, the risk-free rate
considered would differ for an asset with a three-year life versus a 30-year life,
f) The type of cash flow being used, and
g) The bases of value being applied. For most bases of value, the discount rate should be
developed from the perspective of a participant.

3.1 Cost Approach

The cost approach provides an indication of value using the economic principle that a buyer
will pay no more for an asset than the cost to obtain an asset of equal utility, whether by
purchase or by construction, unless undue time, inconvenience, risk or other factors are
involved. The approach provides an indication of value by calculating the current replacement
or reproduction cost of an asset and making deductions for physical deterioration and all other
relevant forms of obsolescence.
a) The cost approach should be applied and afforded significant weight under the following
circumstances:
• Participants would be able to recreate an asset with substantially the same utility as the subject
asset, without regulatory or legal restrictions, and the asset could be recreated quickly enough
that a participant would not be willing to pay a significant premium for the ability to use the
subject asset immediately,
• The asset is not directly income-generating and the unique nature of the asset makes using an
income approach or market approach unfeasible, and/or
• The basis of value being used is fundamentally based on replacement cost, such as replacement
value.

b) Additional circumstances where the cost approach may be applied and afforded significant
weight:
• Participants might consider recreating an asset of similar utility, but there are potential legal
or regulatory hurdles or significant time involved in recreating the asset,
• When the cost approach is being used as a reasonableness check to other approaches (for
example, using the cost approach to confirm whether a business valued as a going-concern
might be more valuable on a liquidation basis), and/or
• The asset was recently created, such that there is a high degree of reliability in the assumptions
used in the cost approach.

3.1.1 Cost Approach Methods

There are three cost approach methods:
i) Replacement cost method: a method that indicates value by calculating the cost of a similar
/asset offering equivalent utility,
ii) Reproduction cost method: a method under the cost that indicates value by calculating the
cost to recreating a replica of an asset, and
iii) Summation method: a method that calculates the value of an asset by the addition of the
separate values of its component parts.

COST CONSIDERATIONS
• The cost approach should capture all the costs that would be incurred by a typical participant.

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The costs are majorly divided into direct and indirect.
• An asset acquired from a third party would presumably reflect their costs associated with
creating the asset as well as some form of profit margin to provide a return on their investment.
• The actual costs incurred in creating the subject asset (or a comparable reference asset) may
be available and provide a relevant indicator of the cost of the asset. But a few adjustments must
be made so that the cost fluctuations between the date on which the cost was incurred and the
valuation date and any exceptional costs or savings that are reflected in the cost data, but would
not arise again, can be reflected.

DEPRECIATION / OBSOLESCENCE
Depreciation adjustments are normally considered for Physical, Functional and Economic
Obsolescence. It should consider physical and economic life of the asset. PHYSICAL
OBSOLESCENCE can be measured in two ways:

1. Curable: Cost to cure/fix the obsolescence.

2. Incurable: Adjustment for physical obsolescence is equivalent to the proportion of the
expected total life consumed.

FUNCTIONAL OBSOLESCENCE
• Excess capital costs: caused by changes in design, material, technology, resulting in the
availability of modern equivalent assets with lower capital costs than the subject asset,
• Excess operating costs: caused by improvements in design or excess capacity resulting in
availability of modern equivalent assets with lower capital costs than the subject asset.

ECONOMIC OBSOLESCENCE
Economic obsolescence arises when external factors affect an individual asset or all the assets
employed in the business and should be deducted after physical deterioration and functional
obsolescence.

General guidelines on valuation

• The valuation should always be conducted by an empanelled independent valuer i.e.,

the valuer should not have a direct or indirect interest in the asset being valued.
• All the necessary / relevant papers / documents should flow directly from the branch to
the valuer & vice versa without routing the same through the borrower/ guarantor
concerned.
• The Valuation Report to be submitted by the valuers stand invariably contains the Fair
Market Value, Book Value, Realizable Value and the Distress Sale Value of the
property being valued. However, for the purpose of determining the present value of the
property mortgaged/ to be mortgaged, the Realizable value should be taken into
consideration. Also in the case of Plant & Machinery, Realizable Value to be accepted
for valuation purposes. However, this approach is not applicable to home loans and
home related loan products for which the guidelines existing prior to circular no.
CCO/CPPD-ADV/49/2019-20 dated 03.07.2019 and NBG/RE,H&HDHL/ 107/2019 -
20 Dt 31.03.2020 will prevail.
• For loans above Rs.1.00 Crore wherein primary/collateral offered as security is valued
above Rs.50.00 lacs, valuation reports (not older than 3 months for new connection)
from 2 empanelled valuers are to be obtained and in case value of the property is below
Rs.50.00 lacs, single valuation is to be obtained. However, in case of Housing loans
above Rs.1.00 Crore valuation reports (not older than 3 months for new connection)
from 2 empanelled valuers are to be obtained irrespective of the value of the property.

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 The fair market value and realizable value, whichever is lower, is to be considered for
arriving at the value of the property. Both the valuation to be conducted simultaneously
and time gap between these two valuation reports shall not be more than a month.
• Valuation report for Asset(s)/ property(ies) to be obtained once in 3 years.
• Where the number of properties offered as security exceeds 10 (ten) and are located at
diverse/ various locations, a notional discount @5% is to be applied on the Realisable
value of the properties and the discounted value should be considered while arriving
at the security coverage.
• In case of variation of 20% or more between the fair market and realizable values as per
the valuation and the guideline value provided in the State Government notification or
Income Tax Gazette, justification on variation has to be furnished by the Valuer.
• Wherever the value of the Asset/property is more than Rs.50.00 Crore, two valuers of
Category ‘A’ may be appointed in order to get the valuation done. In case the difference
in the valuation arrived at by both the valuers is not more than 15 percent lower of the
value to be considered, but when the difference in value by both the valuer is more than
15 percent and reckoning of the lower value is not acceptable to the borrower, then a
third valuer, who shall be also be a senior valuer in the ‘A’ category, may be appointed
and valuation obtained. In such a case, the average of the lower two valuation out of
three valuations made will be taken as the notional market value of the properties
valued.
• Property values reported in leading newspapers as well as property portals such as
magicbricks.com, 99acres.com, housing.com etc., wherever available are to be referred
to and quoted.
• Details of last two transactions in the locality are to be furnished in the valuation report,
wherever available.
• The values quoted by the valuers should be cross-checked by the branch official
concerned by making independent enquiries, property inspection, comparison with
recent sales of similar properties in the neighbourhood and enquiries from parties having
good knowledge of the local property value, for ensuring that only realistic realizable
values are accepted.
• The operating units should also ensure that properties offered as security for credit
facilities sanctioned are not purchased from the loan amount disbursed.
• Valuation of properties purchased on a recent date, viz. for a period up-to one year from
the date of registration of the property, the lower of Registration Value or Realisable
Value shall be reckoned for arriving at the value of the property.
• The operating units should generally insist on property/ ies, which are purchased before
our disbursement. In other cases, operating units should ensure that the properties
offered as security are not purchased out of our loans by verifying end use of funds.
• Further, following modalities should also be adhered to:-
o As soon as the valuation reports are obtained, it should be verified and ensured
that they contain all the details. Blanks and cursory reports should not be
accepted. Further, all the columns in the format of valuation reports should be
duly filled in with remarks and finding of the valuer and if column is not
applicable then a notation to that effect should be made. A valuation report
containing blanks should not be accepted.
o As a measure of strengthening the Due Diligence of the applicable primary/
collateral securities which are Land & Building/ Land in nature/ Plant &
Machinery/ Other tangible assets, valuers to include photograph of owner with
the property in the background, in the report submitted to Branches.
o For easy identification of the applicable primary/collateral securities which are
Land & Building/Land in nature/Plant & Machinery/Other fixed tangible assets,

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 valuers to mention longitude/latitude and co-ordinates of the properties in the
valuation report. Screen shot (in hard copy) of Global Positioning System
(GPS)/ Various Applications (Apps)/ Internet sites (eg. Google earth)/ etc. is to
be included in the valuation report.
o Valuation Report must contain specific views/ comments on the impending
threat, if any, of Road Widening, Take-over of property for public service
purposes, Submerging, Attracting provisos of Coastal Regulatory Zone (CRZ)
etc.
o In case of consortium/ Multiple Banking Arrangement (MBA) the valuation
report format prescribed by the Bank/ IBA is to be utilized. For valuation of
properties valued Rs.50.00 Crore and above, two valuations to be obtained i.e.
one from valuer(s) empanelled with lead bank and 2nd valuation from the
valuer(s) empanelled with the bank having the 2nd highest exposure in the
consortium.

• Branches/ Offices to ensure that residual age of the immovable property should be at
least 5 years more than the tenure of the loan.

• For valuation of assets/ properties pertaining to stressed assets account, Bank’s

guidelines issued on Resolution of Stressed Assets is to be followed.
• The method of valuation of stock – Stock Statement Valuations, Stock Audits etc.

Valuation of Plant & Machinery

• In case of new P & M proposed for purchase, the value mentioned in quotation to be
input for primary security creation in CBS till such time the original invoice is received
• Based on the data available in the audited financials for going concerns, the Bank’s
assessed value need to be arrived at.
• Quotation / invoice price for new (to be verified).
• Depending on the value of the account the requirement of valuer / engineer to be decided
by the official handling the account.
• In case of NPAs the services of the valuer/ engineer to be used to valuate the machinery
and record the same.
• Frequency Annually. Same as original valuation method for going concerns.
• To ensure that repayment schedule is fixed in such a way that at any point of time the
valuation does not fall short of the loan outstanding.

LAND / BUILDING (Non-Agriculture) Primary / Collateral (Mortgage All segments

except Home Loans)

• Current market price / realizable value / whichever is lower, based on Bank's

empanelled valuer's report which should not be more than 3 months old.
• Two valuers for loans above INR1Crore.
• Re-Valuations should be obtained once in three years. Land/ Building for construction
or purchase
• In case of immoveable property under construction, the estimate given by the architect
/ engineer which is countersigned by bank's empanelled valuer to be considered
• In case of building under construction, the valuation report to be obtained immediately
on receipt of completion certificate; thereafter at 3 years intervals

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VALUATION OF SECURITIES FOR PROVISIONING PURPOSE • ANY SECURITY
VALUE TAKEN FROM AUDITED BALANCE SHEET

• Valuation has to be done within 3 months of date of NPA.

• No value from ABS to be considered for provisioning purpose post 90days of account
becoming NPA.
• Subsequent valuation needs to be done within 3 years from the date of last valuation by
the empanelled valuer other than the last ones.
• Whenever, two or more Valuation Reports are taken for arriving Reserve Price (in case
of Sale to ARC / Compromise Proposals / SARFAESI action), the lower of RV to be
considered for provisioning.
• Branches to feed-in Realizable Value of Primary & Collateral security from valid
valuation reports, in CBS, for calculation of provisions

FOR ALL STOCK AND RECEIVEABLES

• Stock Audit to be conducted at annual intervals by external agencies appointed for NPA
with balance of =>INR5CR.
• If the SRA is more than one year old, the primary security is taken as ‘Nil’
• If the SRA is less than one year old; Lower of the value as per SRA or Stock statement
(not older than 90D), need to be taken for computation of security value.

CORPORATE INSOLVENCY RESOLUTION PROCESS ACCOUNTS

• The latest valuation (not exceeding 3 years) available with Branch may be used for the
purpose of provisioning and RV based on latest valuation to be reckoned.

Liquidation cases

• In cases where Liquidation Value has been disclosed, Liquidation value is to be taken
as Security available to the Bank.
• Distress Value to be taken for other cases.

VEHICLES

• WDV is to be taken as security available (except damaged /scrapped )

• On loan anniversary dates, depreciation will be applied on straight line basis as per Cir.
No. CPPD/133/18JAN14

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 KEY LEARNINGS
i. Legal aspects influence every step of lending activity of the Bank. Right from
identification of borrowers, establishing their credentials, assessment of credit
requirement, appraisal, sanction, documentation, disbursement – all these legs of
the lending activity involve legal implications.
ii. Borrowing Powers of a company are defined under statute. A company can
increase its borrowing powers by a special resolution at a meeting of the members.
The special resolution should specify the exact limit up to which the company mat
borrow. The borrowing powers of a company are to be exercised by its Board of
Directors. Short Term Loans, Loans repayable on demand are not reckoned for
determination of borrowing powers. All loans for capital expenditure, though short
term, are reckoned under Borrowing Powers.
iii. Bank has prescribed / standardised documents for establishing various lending
contracts and creation of security interest. Further, services of legal experts
(empanelled lawyers and in-house law officers) are available to operating units for
legal services.
iv. Lending involves creation of assets corresponding to the debt raised. Hence
periodical valuation of assets created is of paramount importance. Bank has drawn
up clear guidelines
v. Charges on assets are created after establishing the position of ownership /
possession through a process called Title Investigation. Ownership and Possession
are both important aspects of title to property as properties not in the possession of
owners without a lease or rent agreement may lead to questions of real ownership
of the property. Reports of Title Investigation are provided by empanelled
advocates.
vi. Establishing the Lender – Borrower contract / Creation of security interest /
execution of documents are done according to the legal requirements and vetted by
legal experts. Bank has standardised SME documents under SME series. Initial
documents, supplemental documents & complementary documents are used.
vii. Perfection of charges by registering security interests created in favour of the Bank
by the Borrowers / Guarantors are undertaken – Registrations are required to be
done with Registrar of Companies, Registrar of Assurances (Land Registry) and
CERSAI

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CHECK YOUR PROGRESS: Multiple Choice Questions
MCQ- Bank's dealing with different types of customers (different constitution of business
1 entities) are governed by different Laws. For e.g., Companies Act, Limited
Liability Act, Partnership Act govern Companies, Limited Liability Partnerships,
Partnership etc. What are the implications of these laws for Bankers dealing with
such customers?