Banking industry in india introduction

Banking Industry In India
Presented by:
Rajesh Kumar
MBA(Finance), ACS, AIII

• Banking is defined as accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise and withdraw able by cheque,
draft, order or otherwise
• The RBI, which commenced operations on April 1, 1935, is at the centre of India’s financial
system. Hence it is called the Central Bank.
• It has a fundamental commitment to maintaining the nation’s monetary and financial
stability. It started as a private share-holders’ bank – but was nationalized in 1949, under the
Reserve Bank (Transfer of Public Ownership) Act, 1948.
• RBI is banker to the Central Government, State Governments and Banks. Key functions of
RBI Include:
I. Monetary policy
II. Supervision of Banking companies, Non-banking Finance companies and Financial Sector,
Primary Dealers and Credit Information Bureaus
III. Regulation of money market, government securities market, foreign exchange market and
derivatives linked to these markets.
IV. Management of foreign currency reserves of the country and its current and capital
account.
V. Issue and management of currency
VI. Oversight of payment and settlement systems
VII. Development of banking sector
VIII. Research and statistics

• Retail banking is when a bank executes transactions
directly with consumers, rather than corporations or
other banks. Services offered include savings and
transactional accounts, mortgages, personal
loans, debit cards, and credit cards.
• International Banking :Every country need to buy
(import) certain goods and services from other
countries in order to bridge the demand and supply
in its economy ,the foreign exchange is the place
where these payment are made banks are amongst
the active members of the foreign exchange market
and they provide certain types of services which
come under International Banking.

Wholesale Banking
• It refers to banking business with industrial and business
entities mostly corporates and trading houses ,including
multinationals ,domestic business houses and prime public
sector companies.
• The product offering under this is suitably structured taking
into account a client’s risk profile and specific needs.
• Wholesale banking is the provision of services by banks to
organisations such as Mortgage Brokers, large corporate
clients, mid-sized companies, real estate
developers and investors, international trade finance
businesses, institutional customers (such as pension
funds and government entities/agencies), and services offered
to other banks or other financial institutions.

Licensing of Banks in India
i) Eligible Promoters: Entities / groups in the private sector, public sector and Non-Banking
Financial Companies (NBFCs) shall be eligible to set up a bank through a wholly-owned Non-
Operative Financial Holding Company (NOFHC).
(ii) ‘Fit and Proper’ criteria: Entities / groups should have a past record of sound credentials and
integrity, be financially sound with a successful track record of 10 years.
(iii) Minimum voting equity capital requirements for banks and shareholding by NOFHC: Initial
minimum paid-up voting equity capital for a bank shall be `5 billion. The NOFHC shall initially
hold a minimum of 40 per cent of the paid-up voting equity capital of the bank for a period
of five years and which shall be brought down to 15 per cent within 12 years. The bank shall
get its shares listed on the stock exchanges within three years of the commencement of
business by the bank.
(iv) Regulatory framework: The bank will be governed by the provisions of the relevant Acts,
relevant Statutes and the Directives, Prudential regulations and other Guidelines issued by
RBI and other regulators.
(v) Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank
shall not exceed 49% for the first 5 years after which it will be as per the extant policy.
(vi) Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should be
independent directors.

(vii) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter
Group. The bank shall not invest in the equity / debt capital instruments of any financial entities
held by the NOFHC.
(viii) Other conditions for the bank :
•The bank shall open at least 25 per cent of its branches in unbanked rural centres.
•The bank shall comply with the priority sector lending targets and sub-targets as applicable to
the existing domestic banks.
•Banks promoted by groups having 40 per cent or more assets/income from non-financial
business will require RBI’s prior approval for raising paid-up voting equity capital beyond `10
billion for every block of `5 billion.
•Any non-compliance of terms and conditions will attract penal measures including cancellation
of licence of the bank.
(ix) Additional conditions for NBFCs promoting / converting into a bank : Existing NBFCs, if
considered eligible, may be permitted to promote a new bank or convert themselves into banks.

Banking And Liquidity Control
• CRR 4%
• SLR 23.0%
• REPO – REVERSE REPO 9%-7%
• OMO
• EG –US QUANTITATIVE EASING

Banking Products - deposits
Deposits are a key source of low cost funds for banks. The deposit accounts serve
various purposes of the account holders:
• A safe avenue to park surplus funds
• Earn a return on surplus funds
• Receive payments from others, and make payments to others
Kinds of Deposits
A. Demand Deposits :These are deposits which the customer can get back on
demand or which are placed for very short time periods
I. Savings account deposits
II. Current account deposits
B. Term Deposits
C. Hybrid Deposits / Flexi Deposits
D. Non-Resident Accounts
I. Foreign Currency Non-Resident Account (FCNR)
II. Non-Resident External Rupee Account (NRE)
III. Non-Resident Ordinary Account (NRO)

Other services
Fund-based Services
• Banks accept deposits and raise other debt and equity
funds with the intention of deploying the money for a
profit. The income that a bank earns, as a percentage of its
loans and investments, is its Gross Yield.
• The interest it pays as a percentage of the resources
mobilised is its cost of funding.
• Gross Yield less the Cost of Funding represents its Gross
Spread.
• Gross Spread less Administrative and Other Costs is its Net
Spread.
 For Business
I. Bank Overdraft
II. Cash Credit
III. Bill Purchase / Discount
IV. Term Loan / Project Finance

 For Individuals
I. Credit Card
II. Personal Loan
III. Vehicle Finance
IV. Home Finance
Non-Fund-based Services
These are services, where there is no outlay of funds by the bank when the
commitment is made. Since there is no fund outflow initially, it is not reflected in the
balance sheet. Therefore, it is reflected as a contingent liability. Such exposures are
called Off Balance Sheet Exposures.
 For Business
I. Letter of Credit
II. Guarantee
III. Loan Syndication
 For Individuals
I. Sale of Financial Products
II. Financial Planning and Wealth Management
III. Executors and Trustees
IV. Lockers

Money Remittance Services
I. Demand Draft / Banker’s Cheque / Pay Order
II. National Electronic Funds Transfer (NEFT)
III. Real Time Gross Settlement (RTGS)
IV. Society for Worldwide Interbank Financial
Telecommunications (SWIFT)

Priority Sector Lending
• Priority Sector Lending is an important role given by the Reserve
Bank of India (RBI) to the banks for providing a specified portion
of the bank lending to few specific sectors like agriculture or
small scale industries. This is essentially meant for an all round
development of the economy as opposed to focusing only on the
financial sector.
• 40% of total lending should consist of priority sector lending.
CATEGORIES of Priority sector lending
1. Agriculture – 17%
2.Small Enterprises
3. Retail Trade
4. Micro Credit
23%
5. Education Loans
6. Housing Loans

Nonperforming Assets
• A debt obligation where the borrower has not paid
any previously agreed upon interest and principal
repayments to the designated lender for an
extended period of time.
• For example, a mortgage in default would be
considered non-performing. After a prolonged
period of non-payment, the lender will force the
borrower to liquidate any assets that were pledged
as part of the debt agreement.
• If no assets were pledged, the lenders might write-off
the asset as a bad debt and then sell it at a
discount to a collections agency.

Performance Measurement
 The banking sector’s performance is seen as the replica of
economic activities of the nation as a healthy banking
system acts as the bedrock of social, economic and
industrial growth of a nation.
 A framework for the evaluation of the current strength of
the system, and of operations and the performance of the
banks has been provided by Reserve Bank’s measuring rod
of ‘CAMELS’ where
C - capital adequacy, A - assets quality, M-management
efficiency, E -earning quality, L- liquidity and S - internal
control systems.
 CAMEL is, basically, a ratio-based model for evaluating the
performance of banks. It is a model for ranking/rating of
the banks.

Capital Adequacy
• It is important for a bank to maintain depositors’
confidence and preventing the bank from going
bankrupt.
• Capital Adequacy reflects the overall financial
condition of the banks and also the ability of
management to meet the need for additional capital.
• It also indicates whether the bank has enough capital
to absorb unexpected losses.
• Capital Adequacy Ratio acts as an indicator of bank
leverage.

1.Capital adequacy ratio (CAR)
• As per the latest RBI norms, the banks in India should have a
CAR of 12%. It is arrived at by dividing the sum of Tier-I, Tier-
II and Tier-III capital by aggregate of risk weighted assets
(RWA). Symbolically,
CAR= (Tier-I + Tier-II + Tier-III)/RWA
• Tier-I capital includes equity capital and free reserves.
• Tier-II capital comprises of subordinate debt of 5-7 years
tenure, revaluation reserves, hybrid debt capital instruments
and undisclosed reserves and cumulative perpetual
preference shares.
• Tier-III capital comprises of short-term subordinate debt.
The higher the CAR, the stronger the bank.

2. Debt-Equity Ratio
• This ratio indicates the degree of leverage of a
bank.
• It indicates how much of the bank business is
financed through debt and how much through
equity. Debt-Equity ratio is arrived at by dividing
total borrowings and deposits by shareholders’ net
worth, which includes equity capital, and reserves
and surpluses.
• Higher ratio indicates less protection for the
creditors and depositors in the banking system.

3. Advances to Assets
This is a ratio of the Total Advances to Total Assets. This
ratio indicates a bank’s aggressiveness in lending which
ultimately results in better profitability. Total advances also
include receivables. The value of Total Assets excludes the
revaluation of all the assets.
4. Government Securities to Total Investments
This ratio shows the risk involved in a bank’s investment.
Government Securities, are generally, considered as the most safe
debt instrument, which, as a result, carries the lowest return. Since
government securities are risk-free, the higher the Government
Securities to investment ratio, the lower the risk involved in a
bank’s investment. It is arrived at by dividing the amount invested
in government securities by total investment.

Assets Quality
• The prime motto behind measuring the assets
quality is to ascertain the component of Non-
Performing Assets (NPAs) as a percentage of the
total assets.
• This indicates what types of advances the bank
has made to generate interest income.
• Thus, assets quality indicates the type of the
debtors the bank is having. The following ratios are
necessary to assess assets quality:

1. Gross NPAs to Net Advance
• It is a measure of the quality of assets in a situation,
where the management has not provided for loss on
NPAs. The Gross NPAs are measured as a percentage of
Net Advances. The lower the ratio, the better is the
quality of advances
2. Net NPAs to Net Advances
It is a measure of the quality of assets in a situation
NPAs. Net NPAs are Gross NPAs net of provisions on
NPAs and interest in suspense account. In this ratio,
Net NPAs are measured as a percentage of net
advances.

3. Total Investments to Total Assets
Ratio
• Total investments to total assets indicate the extent of
deployment of assets in investment as against advances.
• This ratio is used as a tool to measure the percentage of
total assets locked up in investments, which, by
conventional definition, does not form part of the core
income of a bank.
• It is arrived at by dividing total investments by total assets.
• A higher ratio means that the bank has conservatively kept
a high cushion of investments to guard against NPAs.

4. Net NPAs to Total Assets
• It is a measure of the quality of assets in a situation
NPAs. Here, the Net NPAs are measured as a
percentage of Total Assets.
• The lower the ratio, the better is the quality of
advances.
5.Percentage Change in Net NPAs
This measure gives the movement in Net NPAs in relation to
Net NPAs in the previous year. The higher the reduction in Net
NPAs levels, the better is for the bank. It is given by the
formula: %Change in Net NPAs = (Net NPAs at the end of the
year – Net NPAs at the beginning of the year)/Net NPAs at the
beginning of the year.

Management Efficiency
• Management efficiency is another vital component of
the CAMEL Model that ensures the survival and growth
of a bank.
• The ratios in this segment involve subjective analysis
and efficiency of management.
• The management of the bank takes crucial decisions
depending on the risk perception. It sets vision and
goals for the organization and sees that it achieves
them.
• This parameter is used to evaluate management
efficiency as to assign premium to better quality banks
and discount poorly managed ones. The ratios used to
evaluate management efficiency are described as under:

1. Total advances to Total Deposits
• The ratio measures the efficiency of management in
converting the deposits available with the bank (excluding
other funds like equity capital, etc.) into high earning
advances. Total deposits include demand deposits, savings
deposits, term deposits and deposits of other banks. Total
advances also include the receivables.
2. Business per Employee
•This tool measures the efficiency of all the employees of
a bank in generating business for the bank. It is arrived at
by dividing the total business by total number of
employees.
• By business, we mean the sum of total deposits and
total advances in a particular year.

3. Profit per Employee
• This ratio measures the efficiency of employees at the
branch level. It also gives valuable inputs to assess the
real strength of a bank’s branch network.
• It is arrived at by dividing the Profit after Tax (PAT)
earned by the bank by the total number of employees.
The higher the ratio, higher is the efficiency of the
management.
4. Return on Net Worth
It is a measure of the profitability of a bank. Here, PAT is
expressed as a percentage of Average Net Worth.

Earning Quality
• Earning quality reflects quality of a bank’s
profitability and its ability to earn consistently.
• It basically determines the profitability of the bank. It
also explains the sustainability and growth in
earnings in the future.
• This parameter gains importance in the light of the
argument that much of bank’s income is earned
through non-core activities like investments, treasury
operation, and corporate advisory service and so on.
• The following ratios try to assess the quality of
income in terms of income generated by core
activity-income from lending operation.

1. Operating Profit to Average Working
Funds Ratio
• This ratio indicates how much a bank can earn from
its operations net of the operating expenses for
every rupee spent on working funds.
• This is arrived at by dividing the operating profit by
average working funds. Average Working Funds
(AWF) are the total resources (total assets or
liabilities) employed by a bank. It is daily average of
total assets / liabilities during a year.
• The better utilization of funds will result in higher
operating profit. Thus, this ratio will indicate how a
bank has employed its working funds in generating
profit.

2. Spread or Net Interest Margin (NIM) to
Total Assets
• NIM, being the difference between the interest
income and the interest expended as a
percentage of total assets.
• A higher spread indicates the better earnings
given the total assets. Interest income includes
dividend income and interest expended
included interest paid on deposits, loan from
the RBI, and other short-term and long term
loans

3. Net Profit to Average Assets / Return
on Average Capital Employed
• This ratio measures return on assets employed or
the efficiency in utilization of assets.
• It is arrived at by dividing the net profit by average
assets, which is the average of total assets in the
current year and previous year. Thus, this ratio
measures the return on assets employed.
• Higher ratio indicates better earning potential in the
future.

4. Interest Income to Total Income
• Interest income is a basic source of revenue for
banks. The interest income to total income
indicates the ability of the bank in generating
income from its lending.
• This ratio measures the income from lending
operations as a percentage of the total income
generated by the bank in a year. Interest income
includes income on advances, interest on
deposits with the RBI, and dividend income.

5. Non- interest Income to Total Income
• This measures the income from operations other
than lending as a percentage of the total income.
• A fee-based income account for a major portion of
a bank’s other incomes. The bank generates higher
fee income through innovative products and
adapting the technology for sustained service
levels.
• Non-interest income is the income earned by the
banks excluding income on advances and deposits
with the RBI.

Liquidity
• Liquidity is very important for any organization dealing
with money. For a bank, liquidity is a crucial aspect which
represents its ability to meet its financial obligations.
• Banks have to take proper care in hedging liquidity risk,
while at the same time ensuring that a good percentage
of funds are invested in higher return generating
investments, so that banks can generate profit while at
the same time provide liquidity to the depositors.
• Among a bank’s assets, cash investments are the most
liquid. A high liquidity ratio indicates that the bank is
more affluent.
• The ratios suggested to measure liquidity under CAMEL
Model are as follows:

1. Liquid Assets to Total Assets
• Liquid Assets include cash in hand, balance
with the RBI, balance with other banks (both
in India and abroad), and money at call and
short notice.
• This ratio is arrived by dividing liquid assets by
total assets.
• The proportion of liquid assets to total assets
indicates the overall liquidity position of the
bank.

2. Government Securities to Total
Assets
• Government securities are the most liquid and
safe investment. This ratio measures the
proportion of risk-free liquid assets invested in
government securities as a percentage of the
assets held by the bank and is arrived by dividing
investment in government securities by the total
assets.
• This ratio measures the risk involved in the
assets held by a bank.

3. Liquid Assets to Demand Deposits
• This ratio measures the ability of a bank to
meet the demand from demand deposits in a
particular year.
• It is arrived at by dividing the liquid assets by
total demand deposits. The liquid assets
include cash in hand, balance with the RBI,
balance with other banks (both in India and
abroad), and money at call and short notice.

4. Liquid Assets to Total Deposits
• This ratio measures the liquidity available to
the depositors of a bank.
• Liquid assets include cash in hand, balance
with the RBI, balance with other banks (both
in India and abroad), and money at call and
short notice.
• Total deposits include demand deposits,
savings deposits, term deposits and deposits
of other financial institutions.

5. Approved Securities to Total Assets
• This is arrived at by dividing the total amount
invested in approved securities by total assets.
Approved securities are investments made in
the state-associated bodies like electricity
boards, housing boards, corporation bonds,
share of regional rural banks

Basel III
• Basel III or Basel 3 released in December, 2010 is the third in the series of Basel
Accords. These accords deal with risk management aspects for the banking sector.
• Basel 3 measures aim to:
→ improve the banking sector's ability to absorb shocks arising from financial and economic
stress, whatever the source
→ improve risk management and governance
→ strengthen banks' transparency and disclosures.
• The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI
from time to time, will be challenging task not only for the banks but also for GOI. It is
estimated that Indian banks will be required to raise Rs 6,00,000 crores in external capital in
next nine years or so i.e. by 2020.
• The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.
Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) :
Maintaining capital calculated through credit, market and operational risk areas.
Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing with
peripheral risks that banks face.
Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to increase the
transparency of banks

Comparison of Capital Requirements under Basel II and Basel III
Requirements Under Basel II Under Basel III
Minimum Ratio of Total Capital To RWAs 8% 10.50%
Minimum Ratio of Common Equity to RWAs 2% 4.50% to 7.00%
Tier I capital to RWAs 4% 6.00%
Core Tier I capital to RWAs 2% 5.00%
Capital Conservation Buffers to RWAs None 2.50%
Leverage Ratio None 3.00%
Countercyclical Buffer None 0% to 2.50%
Minimum Liquidity Coverage Ratio None TBD (2015)
Minimum Net Stable Funding Ratio None TBD (2018)
Systemically important Financial Institutions Charge None TBD (2011)

Performance Of Banking Sector In India
• India’s banking sector is currently valued at Rs 81 trillion (US$
1.31 trillion). It has the potential to become the fifth largest
banking industry in the world by 2020 and the third largest by
2025, according to an industry report
• The revenue of Indian banks grew four-fold from US$ 11.8
billion to US$ 46.9 billion over 2001-10.
• Main reasons : Foreign Direct Investment (FDI) of up to 74 per
cent with certain restrictions & conservative policies of the
Reserve Bank of India (RBI), which have shielded Indian banks
from recession and global economic turmoil
• The Bankex is an index tracking the performance of important
banking sector stocks, and has grown at a compounded
annual growth rate (CAGR) of approximately 20 per cent over
2003-12

Bank assets as a percentage of gross domestic product (GDP) rose
from 60 per cent in 2000-01 to 93 per cent by 2008-09, but there
after it has plateaued.
Bank credit to GDP ratio more than doubled from 24 per cent to 53
per cent during this period but has remained around that level in the
following years

While the financial expansion has slowed down in the post-crisis
period, the Indian banking sector has shown remarkable resilience
and stability.
During the global financial crisis, the timely recourse to counter-cyclical
prudential and monetary policy measures helped the banking
sector in transiting through this challenging period largely unscathed

Most of the indicators of soundness bear out the
stability of the Indian banking sector. The capital to risk-weighted
assets ratio (CRAR) at the aggregate and bank
group-levels have remained above the statutory
minimum requirement of 9 per cent and international
norm of minimum 8 per cent since 2001

There was a steady improvement in the asset quality through
the 2000s. For instance the gross non-performing assets (NPAs)
as per cent of gross advances had declined from 12.0 per cent in
2000-01 to 2.4 per cent in 2007-08.
Thereafter it has increased to 3.7 per cent by December 2012,
first with higher NPAs in foreign and private sector banks and
more recently in public sector banks

While Indian banks compare well with many other advanced and emerging
economies including BRICS in terms of NPA and CRAR, there is considerable
scope for improvement
Table 1: Indicators of financial soundness, 2012
Sr.
No. Country
Gross NPAs as %
of gross advances
CRAR (%)
Select advanced countries
1 Germany 3.0* 17.9
2 Japan 2.4 14.2
3 UK 4.0 15.7
4 USA 3.9 15.3
BRICS
5 Brazil 3.5 16.7
6 Russia 6.0 13.7
7 India 3.6 13.6
8 China 1.0 12.9
9 South Africa 4.0 15.8
EMEs
10 Indonesia 1.8 17.3
11 Korea 1.6 14.1
12 Mexico 2.4 16.0
13 Turkey 2.7 17.9
CRAR: Capital to risk-weighted assets ratio.
*: Data pertains to 2011.
Source: IMF, Financial Soundness Indicators.

The profitability of the Indian banking sector has been maintained at about 1.0 per cent
in terms of Return on Assets (RoA), even in the post-crisis period. The banks have also
shown significant improvement in other efficiency indicators such as cost to income
ratio, business per employee and business per branch. However, net interest margin
(NIM) has gone up indicating deterioration in allocative efficiency
Table 2: Select parameters of banking sector efficiency
Year-ended
March
Return on assets
(%)
Net Interest Margin
(%)
Cost-income ratio
(%)
Business per
employee
(Rs. lakh)*
Business per branch
(Rs. lakh)*
2001 0.54 3.1 25.9 2.1 34.7
2002 0.82 2.8 22.3 2.5 39.5
2003 1.05 2.9 22.1 2.8 43.0
2004 1.21 3.1 23.7 3.1 47.7
2005 0.97 3.1 26.1 3.5 53.6
2006 0.96 3.0 26.8 4.1 62.6
2007 1.00 2.9 24.0 4.6 68.6
2008 1.10 2.6 21.0 5.6 79.8
2009 1.10 2.6 19.2 6.5 90.1
2010 1.01 2.5 20.2 7.1 92.1
2011 1.06 2.9 21.6 7.7 99.5
2012 1.05 2.9 18.5 8.3 99.3
* At 2004-05 prices
Note: NIM refers to net interest income as per cent of average total assets. RoA refers to net profits as per cent of average total
assets. Cost to income ratio is worked out as operating costs as per cent of total income.
Source: Statistical Tables relating to Banks in India, various issues; Basic Statistical Returns of Scheduled Commercial Banks in
India, RBI.

Challenges Ahead
1. Weakening asset quality is an immediate concern for the banking sector. This is more so as
the banks’ credit composition in the recent years has changed towards longer term assets
such as infrastructure and housing.
2. The net interest margin (NIM) remains relatively high. The banks need to further enhance
their productivity so that the intermediation cost between depositors and borrowers is
minimised. This, coupled with containment of NPAs, will help improve monetary
transmission.
3. Banks need to design appropriate strategies for meeting the capital norms. As per the
broad estimates from the Reserve Bank, public sector banks would require a common
equity of Rs1.4-1.5 trillion in addition to Rs 2.65-2.75 trillion as non-equity capital to meet
the full Basel III norms by 2018.
4. A key factor that accentuated the global financial crisis was excessive leverage. While the
Indian banking system is currently moderately leveraged, according to the guidelines
issued by the Reserve Bank, banks should strive to maintain a minimum Tier I leverage
ratio of 4.5 per cent pending the final proposal of the Basel Committee. It would be
prudent for banks not to dilute their leverage position in the interim period
5. There are proposals for expansion of the banking sector with new entrants. The Reserve
Bank has already invited applications for new banks. Further, as indicated in the annual
policy statement of May 2013, the Reserve Bank is preparing a policy discussion paper on
banking structure in India which would be placed in the public domain. The expansion of
the banking sector commensurate with the growth of the economy would not only
enhance competition but also facilitate financial inclusion.

Project Finance
Project
Green-Field
Project
Brown-Field
Project

Detailed Appraisal
1 • Receipt of information & Documents
2 • Pre – Sanction Visit, Interview & Scrutiny
3 • Promoter’s / Company Assessment
4 • Technical Assessment
5 • Market Assessment
6 • Financial Assessment
7 • Socio-Economic Impact Assessment

Receipt of Information & Documents
• MOA & AOA of Company
• Copy of Licensees Required for the project
(State or Central)
• Name of Directors & Designation
• Management Profile
• Details of Group Companies
• Financial Data Regarding Project
• Details of credit limit enjoyed with other
banks.
• Details of collateral Securities that may
be offered
• IT returns, Wealth tax returns, assets &
liabilities of Company & promoters &
guarantors.
• Shareholding Pattern
• Status report pertaining to land related
matters, appointment of consultants,
facilitation of construction, selection of
contractors and ordering status.

Pre-Sanction Visit & Scrutiny
• A pre sanction visit is done by bank official, to
the proposed project site, Promoters office.
• After the inspection bank scrutinizes the past
record of the company, its promoters, & its
subsidiaries.
• Bank scrutinizes the documents with the help
of CIBIL and RBI’s Defaulters List.

CIBIL
• Credit Information Bureau (India) Ltd; CIBIL is
India’s first Credit Information Company, also
commonly referred as a Credit Bureau. It collects
and maintain the records of payments pertaining
to loans and credit cards of individuals and non-individuals.
using this information a Credit
Information Report (CIR) and Credit Score is
developed, enabling lenders to evaluate
applications. CIBIL gives credit score using
Trans union score, The score is derived by using
the details found in the “Accounts” and
“Enquiries”. It ranges between 300 to 900.

RBI’s Defaulter List
• Pursuant to the instruction of Central
vigilance Commission for collection of
information on wilful defaults of Rs.25 lakhs
and above by RBI and dissemination to the
reporting banks and Financial Institutions, a
scheme was framed by RBI with effect from
1st April 1999 under which the banks and
notified.

Promoter’s or Company Assessment
• 1. Company & promoter background:
• In which constitution the applicant company belongs i.e. (Whether the
company is a public enterprise, private company or registered society). What is
the objective of the company?
• If the company is going for new project then in how many phases the project will
be completed?
• Who are the promoters of the company, and what is their credit worthiness?
• What is the estimated cost of project, how it is going to be financed, what will be
the debt equity ratio?
• What amount has already been brought by the promoter in the project at the date
of application of loan?
• The credit track record of the company, if the company is previously assisted
by the bank. If the company is not earlier assisted by the bank however took
financial assistance from other bank, then banker’s opinion report to be obtained.
• Working and financial position of the company, whether the company has any
contingent liability or not, if company have then what extent it will affect the
financial position of the company in the future?

Continued…..
2. Management & Shareholding Pattern:
• As per the constitution/MOA/AOA, How many
board members are required and the company
has been complying with the same or not?
• Who are the members of the board, their age,
background, and the position held in the
company?
• Whether the company is broad based or not?
• Shareholding pattern of the company?

Continued…….
3. Compliance with Corporate governance Norms.
4. Affiliated/ Group Company:
• Background review of the group companies and the
promoters of the group companies?
• Their nature of business, what kind of business they are
doing?
• Detailed analysis of the financial position of the group
companies?
• Previously they have taken any financial assistance or not, if
taken then banker’s report on it?

Continued…….
• Compliance with exposure norms / credit
policy:
• What is the proposed amount for finance, and
whether the proposed amount are coming within
the exposure norms (capital in absolute terms, %
of total capital fund, exposure to individual
industry, substantial exposure norms, client
selection norms, take over norms) of the bank.

Technical Assessment
1. Project Scope
2. Technical Assessment
• What are the technical arrangements made by the company?
• If company is a manufacturing concern, then the manufacturing process?
• If technical experts are hired for the project, then their previous track
record?
• What kind of plant & machinery is required and from where the same will
be procured?
• Whether the technology used is updated or not?

Continued……..
3. Location and site:
• What is the location of the project, whether there is any
location advantage to set up the project in the said
location?
• Whether the site of the project have good infrastructure
facility, like
– Which is the nearest Railway station
– From which roads the project site is connected with the other
parts of the country
– Which is the nearest port

Continued……
4. Input of production:
• What kind of raw material is required, and
from where it will be acquired, whether it is
available locally or imported, whether the
price of raw material is cheap or not?
• Whether continuous power supply is available
or not for production purpose?
• Water facility is available or not?

Continued…….
5.Implementation schedule & visit report:
• What is the proposed implementation schedule?
• Whether the work is going on as per envisaged schedule?
• Site development work is in progress or not?
• What amount of capital expenditure has been incurred by
the company?
• Whether order for plant & machinery has been placed or
not?
• Which company is engaged in construction process,
their previous projects and background is reviewed?
• From when the project will be fully operative?

Market Assessment
1.Demand outlook:
• End use application
• Historic Demand and growth
• Factors affecting demand
2. Supply Outlook:
• Domestic & International Supply
• Factors affecting supply

Continued……
3. Government Policy:
• Government policy, whether positive or negative
for the respective sector
• If the policy of government will change in future,
then what impact it will have on project?
4. Market Potential:
• Demand Supply Position

Financial Assessment
1. Project Cost:
• What is the total project cost?
• In how many phases the project will be
completed and project cost breakdown of
every phases?
• Cost comparison with similar kind of project
that has been completed to see whether
the cost is high or low in comparison?

Continued……
2. Means of Finance:
• From which source the project will be financed?
• Whether it is financed through promoter’s
contribution, internal accruals, Equity share
capital, unsecured loan or financial assistance
from bank.
• What will be the Debt- Equity ratio?
• Whether proper security margin is available for
taking financial assistance.

Continued…….
3. Performance Indicators:
• What profit will be generated from the project, what will be the
future profitability?
• Following important ratios are checked,
• Debt-equity ratio (DER)
• Current Ratio (CR)
• Fixed assets coverage ratio (FACR)
• Debt service coverage ratio (DSCR)
• Cash flow debt service coverage ratio (CFDSCR)
• Interest coverage ratio (ICR)
• Cash Flow interest coverage ratio (CFICR)
• Internal rate of Return (IRR)

4. Risk and Sensitivity analysis:
• What are the different risk associated with the projects like,
operational risk, financial risk, management risk, market risk,
currency risk etc. and what steps to be taken to mitigate them.
• During the appraisal the sensitivity analysis is also done to ascertain
the effect of adverse change f
• parameters (Sales, raw material price, capacity, cost of power
% utilities) on the project. Any
• negative change on profitability vis-à-vis the projected level may
affect the debt service capacity of
• the project. What will be the profit, and ratios at different level of
operation?
Continued…..

Socio Economic Impact Assessment
1. Economic Considerations:
• The proposed project will have what kind of
impact on overall economic condition.
• Whether it will help in the development of the
area as well as the local people.
• Any scope of foreign exchange earnings.

Continued…..
2. Envoirment Considerations:
• What kind of impact it will have on the enjoinment, if
any negative impact will have then what measures are
taken for the same?
3. Status of Government Consent:
• All the necessary permission are taken or not from the
appropriate authorities?
• Envoirment clearance has taken or not

Bank’s Profitability
• Here bank looks for the total profit generated
by the bank by providing finance to a
particular project.

Means of Financing
• After going through the whole appraisal
process bank decide about the means of
finance.
Means of
Finance
Fund-
Based Limit
Term loan
Short Term
Loan
Non-Fund
Based Limit
Capex LC
Bank
Guarantee

Lending Arrangement
• If the amount required for loan is huge then in
that case, as per the company arrangement
lending arrangement is decided. As per RBI
various lending arrangement are,
– Sole Banking Arrangement
– Multiple Banking Arrangement (MBA)
– Consortium Banking Arrangement.

Assessment of Non-Fund Based limit
• Computation Showing assessment of Letter of Credit
Particular Amount (Rs)
Projected annual purchase of Raw material (A) *****
Projected annual purchase under LC (B) *****
Projected annual purchase under LC C= (A)*(B) *****
Monthly raw material being purchase through LC [(C)
/12] = (D)
*****
Usance Period (month) (E) *****
Lead Period (month) (F) *****
Amount of LC required G= (D)*(F+F) *****

• Some Generalized terms & conditions that are stipulated by the banks are,
– Bank asks its applicant borrower to take insurance of its assets through banks insurance channel.
– Agree that the loan should not be utilised for any purpose other than for which it is
sanctioned in particular and shall not for any of the following purposes viz. repayment of dues
of promoter’s/ association concern/ inter corporate deposit.
– The borrower shall undertake to provide all relevant data/ information to be furnished and disclosed to
Credit information Bureau (India) Limited (CIBIL) authorities and to other statutory bodies as
may be required by bank from time to time.
– The borrower shall not escrow its future cash flow or create any other charge or lien or interest of what
so ever nature thereon without the prior approval of the bank.
– Borrower shall submit the audited/ unaudited financial statements as specified below:
• Provisional- Within 3 months form the close of the accounting year
• Audited- Within 6 months from the accounting years
– Bank reserve the right to withdraw the facilities in the event of any change in circumstances including
but not limited to a material change in the ownership / Shareholding pattern / management of the
firm.
– If the proposed finance is in consortium or multiple banking arrangements then NOC/Pari passu letters
from other lenders.
Terms of Sanction

Working Capital Finance
• working capital finance is the fund required
to meet the cost involved the working
capital cycle or operating cycle.

Banking industry in india introduction

Banking industry in india introduction

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Banking industry in india introduction