L1 - Banking-Corporate Banking

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    Banking

    Corporate Banking

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    Types of Borrowers

    Sole Propreitorship

    Partnerships

    Limited Companies

    Sovereigns

    Quasi-sovereigns

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    Types of Credit Facilities

    Term Loan

    Amortisation of loan facilities should be arranged in accordance with

    the cashflow projections

    Working Capital Facilities

    Short Term Loans

    Overdraft Facilities

    Trade Facilities

    Factoring

    Effects Not Cleared

    Treasury Product Facilities

    Guarantees

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    Types of Guarantees

    Bid Bond (also called Tender Guarantee)

    It gives the employer compensation for additional costs if the party

    submitting the tender does not take up the contract and it must be

    awarded to another party

    Performance Guarantee

    A payment to the employer in the event that the contractor fails to

    fulfil contract obligations

    Advance Payment Guarantee

    This enables the employer to get a refund of advance payments made

    in the event of default by the contractor Standby Letter of Credit

    This is used as security for payment obligations

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    Calculation of Working Capital Limits

    Working Capital requirements upto INR 5 crore Minimum of 20% of the turnover

    Working Capital requirements above INR 5 crore. Banks may adoptany of the under-noted methods.

    The turnover method, as prevalent for small borrowers,

    Since major corporates have adopted cash budgeting as a tool of fundsmanagement, banks may follow cash budget system for assessing theworking capital finance in respect of large borrowers.

    The banks may even retain the concept of the MPBF with necessarymodifications.

    Calculation of MPBF (Maximum Permissible Bank Finance) Method 1 : MPBF = 75% of [C.A. C.L.]

    Method 2 : MPBF = 75% of C.A. C.L.

    Method 3 : MPBF = 75% of [C.A. Core C.A.] C.L.

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    Calculation of Working Capital Limits

    Method 1 : MPBF = 75% of [C.A. C.L.]

    = 75% x (700 280) = 315 (indicates excess borrowing of 85) Method 2 : MPBF = 75% of C.A. C.L.

    (75% x 700) 280 = 245 (indicated excess borrowings of 155

    Current Liabilities Current Assets

    Creditors 200 Raw Materials 300

    Other Current Liabilities 80 Work-in-progress 100

    S.T. Bank Borrowings 400 Finished Goods 150

    Receivables 100

    Other Current Assets 50

    Total 680 Total 700

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    Types of Security

    Deposits

    Shares or Other Securities

    Land

    Goods (pledge or hypothecation)

    Guarantees

    Stand-by Letter of Credit

    Letter of Awareness / Letter of Comfort

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    Credit Application

    Background Industry

    Management

    Suppliers

    Manufacturing (stock levels [RM, WIP, FG], condition of plant, efficiency levels,

    insurance, power, water , environmental factors)

    Marketing

    Labour / Staff

    Financial Analysis (profitability, liquidity, working capital management, capital

    adequacy, cashflow and debt servicing ability of the borrower)

    Other Bankers

    Facilities Summary

    Security

    Covenants

    Profitability Summary

    Recommendation

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    Credit Scoring

    Combination of Financial Assessment

    Business Assessment

    Industry

    Company

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    Profitability of Relationships

    Economic Profit

    = Return on Risk Assets Capital Cost of Risk Assets

    Pricing influenced by

    Credit risk of the borrower

    Competitive pressures

    Security offered

    Level of non-funds income and other income, and

    The effect on overall EP

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    Early Warning Signals

    Internal Unauthorized drawings in excess of limits

    Delays in the payment of interest and principal

    Delays in receipt of financials

    Drawings against uncleared funds Breach of loan covenants

    Dwindling cash position

    External

    Decline in market share

    Dividend cut

    Top Management movements

    Institutional sales

    Switching auditors

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    Consortium v/s Multiple Banking

    Consortium Banking Several banks (or financial institutions) finance a single borrower with

    common appraisal, common documentation, joint supervision and

    follow-up exercises

    Multiple Banking

    Different banks provide finance and banking facilities to a single

    borrower without having a common arrangement and understanding

    between the lenders

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    Exposure Norms

    Prudential measures aimed at better risk management and avoidance ofconcentration of credit risks, the Reserve Bank of India has advised the banksto fix limits on their exposure to specific industry or sectors and has prescribedregulatory limits on banks exposure to individual and group borrowers inIndia.

    Credit to Individuals/ Group Borrowers

    15% of capital funds in case of single borrower 40% of capital funds in case of group borrower

    May exceed the exposure norm of 15 percent of the bank's capital fundsby an additional 5 percent (i.e. up to 20 percent) provided the additionalcredit exposure is on account of extension of credit to infrastructureprojects.

    Similarly it can go upto 50% in case of group borrower

    In exceptional circumstances, with the approval of their Boards, Banksmay consider enhancement of the exposure to a borrower (single as wellas group) up to a further 5 percent of capital funds

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    Exposure Norms

    Lending under Consortium Arrangements Will also be applicable to lending under consortium arrangements.

    Rehabilitation of Sick/Weak Industrial Units

    Not applicable to existing/additional credit facilities granted to weak/sick

    industrial units under rehabilitation packages.

    Guarantee by the Government of India Would not be applicable where principal and interest are fully guaranteed by

    the Government of India.

    Loans against Own Term Deposits

    Would not be applicable where loans and advances are granted against the

    security of a banks own term deposits to the extent that the bank has a specific

    lien on such deposits.

    Exposure

    Exposure shall include credit exposure and investment exposure. The

    sanctioned limits or outstandings, whichever are higher, shall be reckoned for

    arriving at the exposure limit.

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    Exposure Norms

    Banks are allowed to extend credit/non-credit facilities (viz. letters ofcredit and guarantees) to Indian Joint Ventures/Wholly-owned

    Subsidiaries abroad and step down subsidiaries which are wholly owned

    by the overseas subsidiaries of Indian Corporates (subject to a limit of 20

    percent)

    The Banks aggregate assets outside India should not exceed 25 percent ofthe bank's demand and time liabilities in India.

    The aggregate exposure of a bank to the capital markets in all forms

    should not exceed 40 per cent of its net worth. Within this overall ceiling,

    the banks direct investment in shares, convertible bonds / debentures,

    units of equity-oriented mutual funds and all exposures to Venture Capital

    Funds (VCFs) [both registered and unregistered] should not exceed 20 per

    cent of its net worth.

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    Lending to Micro, Small, Medium Enterprises

    (MSME) / Priority Sector

    Enterprises engaged in the manufacture or production, processing orpreservation of goods as specified below:

    Amicroenterpriseis an enterprise where investment in plant and machinerydoes not exceed Rs. 25 lakh (10 lakhs)

    Small enterprise- more than Rs. 25 lakh but does not exceed Rs. 5 crore (10lakhs 2 crores)

    Mediumenterprise- more than Rs.5 crore but does not exceed Rs.10 crore (2crores to 5 crores)

    Investment in plant and machinery is the original cost excluding land andbuilding

    Categories of Priority Sector

    Agriculture (Direct & Indirect)

    Micro & Small Enterprises

    Micro Credit (50K)

    Educational Loans (10 lakhs, 20 lakhs)

    Housing Loans (20 lakhs)

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    Lending to Micro, Small, Medium Enterprises

    (MSME) / Priority Sector

    Domestic Commercial Banks Foreign Banks

    Total Priority Sector

    Advances

    40 per cent of Adjusted Net Bank

    Credit (ANBC)

    32 per cent of ANBC

    Total Agricultural

    Advances

    18 per cent of ANBC No target

    Of this, indirect lending in excess

    of 4.5% of ANBC, will not be

    reckoned for computing

    performance under 18 per cent

    target. However, all agricultural

    advances under the categories

    'direct' and 'indirect' will bereckoned in computing

    performance under the overall

    priority sector target of 40 per

    cent of ANBC

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    Lending to Micro, Small, Medium Enterprises

    (MSME) / Priority Sector

    Domestic Commercial Banks Foreign Banks

    Micro & Small

    Enterprise

    advances (MSE)

    Advances to micro and small enterprises

    sector will be reckoned in computing

    performance under the overall priority

    sector target of 40 per cent of ANBC

    10 per cent of ANBC

    Micro enterpriseswithin Micro and

    Small Enterprises

    sector

    (i) 40 per cent to micro (manufacturing)enterprises having investment in plant and

    machinery up to Rs 5 lakh and micro

    (service) enterprises having investment in

    equipment up to Rs. 2 lakh;

    (ii) 20 per cent to micro (mfg) 5-25 lakhs,

    and micro (service) enterprises 2-10 lakhs(iii) The increase in share of micro

    enterprises in MSE lending to 60 per cent

    should be achieved in stages, viz. 50 per

    cent in the year 2010-11, 55% in the year

    2011-12 and 60% in the year 2012-13.

    Same as for domesticbanks.

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    Lending to Micro, Small, Medium Enterprises

    (MSME) / Priority Sector

    Domestic Commercial Banks Foreign Banks

    Export Credit No Target 12 per cent of ANBC

    Advances to

    weaker sections

    10 per cent of ANBC No target

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    Provisioning Norms

    Non Performing Assets : An asset, including a leased asset, becomesnon performing when it ceases to generate income for the bank.

    A non performing asset (NPA) is a loan or an advance where:

    interest and/ or instalment of principal remain overdue for a period ofmore than 90 days in respect of a term loan,

    the account remains out of order, in respect of an Overdraft/Cash Credit(OD/CC),

    the bill remains overdue for a period of more than 90 days in the case ofbills purchased and discounted

    Categories of NPAs

    Substandard Assets (10%, 10%)

    Doubtful Assets (20% 30% 100%, 100%)

    Loss Assets (100%)

    Standard Assets (Agricultural & SME 0.25%, Real Estate 1%,others 0.4%)

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    Thats it for now!