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i) Working Capital

Following systems are followed for assessment of working capital requirements of the borrowers:

Simplified method linked with turnover

Simplified method based on turnover for assessing working capital finance upto Rs.2 crore (upto Rs. 5 crore in case of SSI units).

MPBF System

Existing MPBF system with flexible approach are followed for units requiring working capital finance exceeding the above-mentioned amount.

Cash Budget System

Cash Budget System is followed in Sugar, Tea, Service Sector and Film Production accounts. It is the banks endeavour to introduce the same selectively in other areas also.

Loan System for Delivery of Bank Credit

Borrowers are given freedom to decide the proportion of Cash Credit and Loan Component of working capital limits, period of such loans and renewal/roll over of loan component.

To encourage availment in WCDL, branches allow concessions in the rate of interest to the extent of 0.25% to 0.75% in terms of extant guidelines provided the minimum availment under WCDL is of Rs.1 crore. Borrowers in whose favour Sub- BPLR rate has been approved will not be entitled to the above concessions.

ii) Assessment of Non-fund based facilities

Assessment of Non Fund based facilities are subjected to the same degree of appraisal, scrutiny as in the case of fund based limits, interalia, because outstanding in these facilities are reckoned at 100% for exposure purposes. Therefore, need based requirement of a borrower should be assessed after reckoning the lead time, credit period available, source of supply, proximity of supplier, etc. in case of LCs and industry practices and business requirements in case of LGs. The working of NFB assessment is to be incorporated in the appraisal note. Further, while assessing non-fund facilities, cash flow aspects should also be taken into account.

iii) Term Loan

In case of infrastructure/mega projects, proper appraisal is made by utilizing the services of specialized/Technical officers.

The term loans with remaining maturity period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend, as is being done for ALM.

All proposals for infrastructure projects are sanctioned by GM & above at Head Office only except in case of following proposals

i) Involving agro-processing and supply of inputs to agriculture is sanctioned by officials at various levels within their vested loaning powers.

ii) Relating to construction for preservation and storage of processed agro products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality are sanctioned by CM/RM & above within their vested loaning powers.

iii) For construction of educational institutions and hospitals for running the same by their promoters is to be sanctioned by officials at various levels by exercising vested loaning powers.

However, in case of construction of educational institutions and hospitals by companies/individuals engaged in construction or development of real estate projects are sanctioned by ZMs & above.

iv) Relating to Water Supply Project, Irrigation Project, Water Treatment System, Sanitation &

Sewerage System or Solid Waste Management System, are considered at the level of ZMs &

above within their vested loaning powers.

v) For financing installation of wind mills for captive generation of power are sanctioned by various field functionaries within their vested loaning powers. However, advances for installation of Wind Mills for generation of wind energy for sale to other manufacturers would fall under the category of infrastructure projects and such proposals are considered at HO level.

1.3 (a) Monitoring of Weak/Irregular Accounts

The bank has established systems for Inspection and control of its Lending activity so as to have a sound credit portfolio. These systems have stood the test of time. The Pre-sanction appraisal, Post sanction monitoring process for corporate, retail and priority sector loans, Systems for Restructuring of weak borrowal accounts, Recovery process to be adopted for problem loans, Compromise policy etc. are all well documented through various circulars issued from time to time.

(b) Restructuring of Accounts/Corporate Debt Restructuring (CDR)

Restructuring of accounts is one of the means available to restore an account back on rails. It is, therefore, essential to apply this prescription well in time as the delay may erode the basic viability of the account. In order to save the potential accounts from slippage to NPA category, bank will go for restructuring of these accounts within the framework of RBI guidelines. Quick decision should be taken within 90 days delinquency norms to avoid slippage to NPA category.

Under CDR Mechanism, Zonal Managers and above shall consider proposals within their vested loaning powers for sanctions/restructuring of loans.

2. Grading of Borrowers under the Rating system

In order to provide a standard definition and benchmarks under the credit risk rating system, following matrix has been adopted in all the risk rating models.

Rating category

Signification Description

PNB –AAA Minimum Risk Excellent Business Credit, Superior Asset Quality, Excellent debt capacity and coverage.

PNB-AA Marginal Risk Very good business credit, very good asset quality and liquidity, very good debt capacity and coverage.

PNB-A Modest Risk Good business credit, good asset quality and debt capacity & coverage.

PNB-BB Average Risk Average business credit with satisfactory asset quality and liquidity, good debt capacity and coverage.

PNB-B Marginally Acceptable business credit with average risk,

Rating category

Signification Description

Acceptable Risk acceptable asset quality, modest debt capacity.

PNB-C High Risk Not creditworthy, generally acceptable asset quality.

PNB-D Caution Unacceptable business credit, normal repayment in jeopardy, inadequate projected net worth and paying capacity.

Rating with AAA, AA, A and BB grade signify “Investment Grade”. B rating grade is known as

“Marginally Acceptable Risk Grade” and C and D rating grade are called “High Risk Grade”.

Steps taken to strengthen the rating exercise:

a) Certain hurdle points have been incorporated in credit risk rating models so that the borrowal accounts below a particular benchmark are subject to detailed specific risk analysis. Based upon certain hurdle points risk rating is downgraded.

b) In order to stabilize and create robust credit risk management system, bank has been continuously monitoring the ratings and their migration. Seminars, workshops, regular visits of senior officials and video conferences are conducted regularly to equip the Zonal CRMD officials to monitor the migration and reduce deviation. Notes on rating migrations are placed to CRMC for information.

3. Reporting and Analysis of Credit Risk

The MIS in respect of risk rated accounts under all the models (based on the amount of the limits) is to be made available to the Risk Management Division. To ensure the quality and consistency of basic risk related data, the process of rating and vetting has been defined as under:

Loan Sanctioning Authority

Credit Risk Rating Authority Vetting/Confirming Authority

HO

ii) In case of other Models, branches to rate the accounts. The assistance of Functional Manager (Credit) of RM Office may be taken in case of need.

Incharge, Zonal CRMD

RO Branch with assistance of

Functional Manager (Credit) of RM Office.

An officer designated by RM/SRM not connected with

processing/recommending of the concerned loan proposal

Branch Officer/Manager, Credit Section An official designated by the Incumbent not connected with processing / recommending of the concerned loan proposal.

Rating/vetting at BOs in accounts with limits of Rs. 50 lakhs and below:

In such cases of accounts having aggregate sanctioned limits of Rs 50 lakhs and below in branches where there is no second officer available, the rating and vetting is done by the same authority.

However in such cases in order to ensure the quality Credit risk rating, the same has to be submitted by the BO to the higher authority along with the limit-sanctioned statements regularly.

Data is collected by RMD, HO for:

- Compilation of credit portfolio and its movement - Validity of various ratings

- Migration analysis - Default probabilities

- Validations of the risk rating models output.

Validity of Credit Risk Rating

The credit risk rating of a borrower becomes due for updation after the expiry of 12 months from the month of confirmation of rating or 18 months from the date of balance sheet on the basis of which credit risk rating was assigned, which ever is earlier.

The rating is treated as ‘overdue’ after the expiry of 15 months from the month of confirmation of rating or 21 months from the date of Balance Sheet on the basis of which the credit risk rating was assigned, whichever is earlier.

After the expiry of the above period, the rating is stated as ‘Due’ or ‘Overdue’ for renewal as the case may be and word ‘Due for renewal’ or ‘Overdue for renewal’ will be suffixed along-with the rating wherever it is quoted.

In case a borrower has extended the accounting period, the vetting authority considers the extension of the validity of the earlier rating on the merit of each case.

Fresh rating is assigned to a borrowal account, irrespective of the validity period stated above, if any material development/information on the borrower comes to light, which may affect the rating adversely.

In case rating is overdue for non-receipt of Balance Sheet, penal interest is charged in such accounts as per extant guidelines.

4. Portfolio Management

The rated portfolio of the loan accounts is monitored by RMD periodically to ensure proper mix of various risk category accounts and thereby the asset quality of the portfolio. With this aim the bank has taken the following measures:

Evaluation of rating wise distribution of borrowers in various industries is done to assess/appraise the quality of bank’s portfolio.

i) Industry scenario analysis is being undertaken taking into consideration the changes in

industrial and external environment e.g. changes in Economic/Fiscal/Monetary policies, general slowdown/boom in the economy etc.

ii) All limits are to be renewed/reviewed at least once in 12 months. In order to have constant monitoring of the portfolio of the bank in the lower rating categories of “C” & “D” the bank has the system in place of having discriminatory time schedules for review of Credit limits in these categories of accounts. The review of such accounts is required to be done every 6 months.

iii) The Bank has since appointed “Relationship Managers” in its Large Corporate branches with the aim of proper monitoring of bank’s exposure in high value accounts so as to ensure constant surveillance on the substantial share of the loan portfolio of the bank which can alter its risk profile.

5. Use of Securities as Risk Mitigants

There are well-laid guidelines for definitions of primary and collateral securities and their valuations.

The understanding of the field functionaries to use securities as risk mitigant is well established. The bank has issued detailed guidelines to be followed up for verification and valuation of securities charged to the bank.

Primary Security –Verification & Valuation: Verification and valuation of primary security is to be done on regular basis so as to ensure the quality. There are prescribed guidelines in respect of the frequency of verification of securities/stocks & valuation thereof, methodology for computation of Drawing Power.

Collateral Security: Apart from primary security, bank takes collateral security in borrowal accounts to mitigate the risk. Detailed guidelines on creation of valid charge, valuation and verification of various types of collateral security are issued from time to time.

6. Use of Guarantees as Risk Mitigants:

Appropriate acceptable guarantee is obtained as the risk mitigant in various borrowal accounts. The understanding of the field functionaries to use Guarantees as risk mitigant is also well established.

Present, credit risk rating system evolved in the bank is aimed at measuring the Probability of Default of the borrower. To measure the impact of Credit Risk Mitigants, bank is implementing Facility Rating Model.