1.

Introduction
Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation,
prudential norms, reduction in reserve requirements and supervision of risk. There is a major change in
the way corporates are availing loans in the current financial markets, though the progress on the
structural and institutional aspects have been comparatively slower. IDBI Bank is one of the nationalized
banks in India that has a substantive history since 1964. The bank not only deals in corporate banking
but has also expanded its area of operation in multidimensional services like consumer banking, finance
and insurance, investment banking, mortgage loans, private banking, private equity, wealth
management, Agriculture Loan. This report deals with the lending procedures followed by IDBI Bank.
Different types of advances, method of assigning credit limit and drawing power to business units has
been the study during the internship process. The credit rating methods are applied by the banks to rate
the credibility of the prospective clients, securities accepted against lending and loan pricing. The credit
appraisal starts with understanding the need of and purpose for the loan to the borrower i.e. for which
purpose the loan is required and how much. After this, the next step is to analyze the financial
statements of the company to whom the loan is to be sanctioned. The main things which comprise
credit analysis (appraisal) are analysis of financial statements, analysis of nature and level of activity,
accounting policy, qualities of assets and liabilities, sales growth, Profitability, financial leverage,
repaying capacity etc. of the company and final decision as to sanction or rejection of the loan proposal
taking into consideration the promoters background, past credit history and track record, securities
offered, RBI policy and banks loan policy. Then we do a site visit to the company for checking the raw
materials, land, creditors, buyers, distance from the key transportation facilities like railway station,
transport companies etc. Then we do a credit rating for the company which will be internal rating using
a tool called RAM (Risk Assessment Model). Combining this with the external rating by companies like
CRISIL, CIBIL etc. IDBI will prepare the documentation on the loan. Then there will be a monitoring
process done regularly to check whether the companies is doing well or not.
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2. OBJECTIVE OF THE STUDY
The primary goal of this study is:
it facilities of the bank

loans both for term loans and working capital loans to meet the requirements of corporate customers.

scrutiny of loan application to the credit decision making and up till supervision and monitoring of the
loan accounts/borrowers activities.

In a nutshell the study pertains to check the technical, financial and legal aspects of the bank lending
process.
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3. EXPLANATION OF THE CONCEPTS
Credit Appraisal means an investigation/assessment done by the banks before providing any Loans &
advances/project finance & also checks the business, managerial, financial & technical viability of the
project proposed, its funding pattern & further checks the primary & collateral security cover available
for recovery of such funds.
Structure of the credit sanctioning authority:
Fig 1: Structure of the credit sanctioning authority
The credit division looks after the credit related proposals in the respective branch of the bank. Each
branch has been given some authority to sanction certain amount and type of loans. For example term
loans and working capital loans for corporates having turnover above Rs.50 Cr. is dealt by the corporate
branch in IDBI bank. Similarly the proposals by the corporates having turnover less than Rs.50 Cr. are
scrutinize by mid corporate branch i.e. the SME branch of the IDBI bank.
Apart from that the loan sanctioning capacity is different for different branches. In IDBI bank the branch
has been given the sanctioning ability up to credit limit of Rs.2 Cr. For credit Rs.2 to Rs.5 Cr. is
sanctioned by the circle office and for loans above Rs.5 Cr. head office is required for sanctioning.
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Types of Loans:
Working Capital and types of Working Capital Facilities:
Apart from financing for fixed assets such as land, machineries, every business also requires funds on a
continual basis for carrying on its day to day operations. These include expenses incurred due to
purchase of raw materials, manufacturing, selling, and administration. Business transactions are
generally carried on credit basis with a number of days elapsing subsequent to the sale being effected
for realization of proceeds. While part of the raw material may be purchased by credit, but the company
would still need to pay its employees, meet manufacturing & selling expenses (wages, power, supplies,
transportation and communication) and the balance of its raw material purchases for the finished
goods. Working capital basically refers to the source of financing required to by businesses on a
continual basis for meeting these needs.
Thus the urgency for working capital arises from the prevalence of credit in business transactions, need
to fund the manufacturing of the goods and to support and to remain alert for the variations in the
supply of raw material and demand for finished goods.
Characteristics of working capital:

monitoring is required.

Lending is based upon mainly two types Fund Based and Non Fund Based.
Fund Based Lending:
In this type of lending actual funds flow take place i.e. actual cash outflows are made to the borrower by
the bank. In most of the cases the working capital credit is given against some primary security,
collaterals and person guarantees. Different types of facilities available are:
1. Overdraft: A provision with a bank that allows an account holder of the bank to draw funds in excess
of the amount on deposit is known as overdraft facility. This type of financing is most commonly used by
businesses to make their working capital more flexible, although individuals can also avail such facilities.
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2. Cash credit Account: This account is the most primary and known method in which Banks give credit
against the security. It behaves like a current account but the money/amount in this case can be
withdrawn from this account is not restricted to the amount deposited in the account. Instead, the
account holder/borrower is only permitted/authorized to withdraw a specified sum/amount called
"limit" or "credit facility". Cash Credits, in general, are payable on demand. These are, therefore,
considered to be the counter part of demand deposits of the Bank. 3. Bill Discounting: Bill discounting is
one of the major activity with some of the Banks. In this type of lending, Bank takes the bill drawn by
borrower on borrower's customer and pay him immediately deducting some amount as discount or
commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and
collect the total amount. 4. Demand loans: Demand loans are credit agreements which provide the
lender with the ability to demand full payment of the outstanding balance of the loan at any point of
time after the loan amount is sanctioned. Unlike an instalment loan, the demand loan format does not
have a specific maturity date and may not also include a specific schedule for making payments.
Sometimes known as a call loan, usually a demand loan is employed when the lender and borrower have
a long and positive business relationship, and the lender believes that the borrower will repay the loan
within a reasonable period of time.
Non-Fund based Lending:
1. Letter of Credit: A bank issues letter of credit which signifies its commitment to honor the payment
terms of the specified transaction if the seller delivers the goods as stipulated in the contract. A letter of
credit could either be issued for domestic transaction or for international trade. However, its usage is of
greater importance in the context of transactions taking place between the parties belonging to
different countries. The importance of Letter of Credit in foreign trade has arisen because of the
characteristics of foreign trade such as long time gap between dispatch of goods & realization of
proceeds and lower level of comfort about the counterparty. 2. Deferred Payment Guarantee: The
Deferred Payment Guarantee (DPG) is a bank facility where the bank does not directly extend a loan to a
unit for acquiring an equipment. Instead of which it extends a guarantee to the equipment
manufacturer on behalf of its client that the financing extended by the manufacturer (by himself or
through its preferred financier) would be
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repaid as per the terms agreed upon. The bank at request of customer issues such provisions when the
borrower purchases goods or machineries from a creditor on the terms that payment will be done after
a specified time in lump sum or in instalments. The creditor in order to safe guard its interest requires
such deferred payment to be guaranteed by the bank. Such a Bank Guarantee contains an undertaking
by the banker that that payment which is deferred shall be paid by the principal debtor, failing which the
banker will pay the specified amount to the creditor 3. Letter of Guarantee: A letter of guarantee is
issued by a banker to a third party specifying that the bank would meet the financial consequences (up
to a specified amount) in case of any failure of its client while adhering to the terms of the contract with
the third party. Letters of guarantee are basically of the following nature: (i) Performance Guarantees:
The bank guarantees to make good the penalty in case of any failure of its client to meet the specified
obligations. (ii) Financial Guarantees: The bank here guarantees to make good any default by its client in
honoring commitments made in a financial transaction.
Trade Finance:
Trade Finance is basically related to 'Domestic as well as International Trade Transaction'. For a trade
transaction there should be a Seller to sell the goods or services and a Buyer who will buy the goods or
use the services. Various intermediaries such as (banks), (Financial Institutions) can facilitate this trade
transaction by financing the trade.
While a seller (the exporter) can require the purchaser (an importer) to prepay for goods shipped, the
purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have
been shipped. Banks may assist by providing various forms of support. For example, the importer's bank
may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon
presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by
advancing funds) to the exporter on the basis of the export contract.
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Long Term Loan Facilities:
Term Loan:
Bank helps the corporates in acquisition of capital goods/asset creation for their project on long
term basis by providing Term loan facilities.
Term Loan is one type of long term credit facility availed by the borrower for fixed amount over a fixed
period of repayment and floating rate of interest depending upon banks internal lending policy. The
borrower is provided a schedule of repayment of the credit provided by the lending institution
consisting of principal amount and interest calculated accordingly.
Term Loan is secured by a primary security, collateral and personal guarantee (detailed mentioned in
the subsequent chapter under the heading security). Term Loan facilitates the borrower to raise the
availed credit amount at a time and plan the business expenditure or investment or purchases
accordingly. Usually the purpose for which the credit is availed is mentioned during initial stage of the
sanction. The maturity period or term is between 1 10 years.
Key facts regarding term loan:

Purchase of Fixed Assets:

For the purchase fixed assets like premises, plant & machinery etc. term loan is generally availed by the
corporates. The usage or performance of assets purchased increase the performance of the business
and hence the profit of the company increases. It is generally wise to avail term loan facility for buying
of asset even if the loan adds extra burden upon the borrower because productivity of the company
increases due to the asset which is purchased. Again if a premises is purchased then the value of
premises will appreciate and hence the business can have higher value of leverages for premises which
further can be used to raise funds for business expansion or diversification.
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Switching of Higher Interest Loans:
Sometimes borrower opt to raise term loans at higher rate of interest as such loans are processed and
sanctioned faster but in return it results for huge burden when interest is paid. This interest which is to
be paid becomes a major part of the monthly expenses and starts dwindling the profits earned by the
company. To arrest the growing rate of interest and penalties the higher interest loan can be switched
to lower rate of interest loans or term loans.
In this way the borrower can reduces the growing burden of interest the credit availed and hence can
save a considerable amount of profit earned. It also benefits in maintaining the credit rating as the
borrower.
Mortgage Term Loan:
A Term Loan can also be availed by mortgaging securities like home, office premises etc. This type of
loan is borrowed usually for a longer period of time mainly for 10, 15 or 20 years. The repayment of the
principal amount and interest may be fixed in nature or it may vary over the course of repayment
depending upon bank policy. The borrower may avail the revised rate of interest later and may be
benefited by saving in interest.
Equipment and Vehicle Financing:
Banks have entered into Equipment and Vehicle Financing in a big way in the last few years.
The Equipment and Vehicle Financing is largely on the lines of NBFCs and has been covered in detail in
that section.
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4. LEARNING FROM THE STUDY/PROCEDURES

4.1 CREDIT APPRAISAL PROCESS:

(i) Sourcing of customers: Usually the customers/clients initiates the process i.e. they approach the
bank branch office to put forward a request regarding either term loan or working capital loan or trade
finance to meet their day to day activities. It may be a fresh request for the credit or enhancement of
existing credit taken by the customers. But the banks also source the customers specially the corporates
according to the bank policy. Basically they check the turnover of the company and if the turnover is

according to the desired level then they approach the concerned officer of the company regarding some
term loans or working capital requirements. In IDBI bank, the corporate branch source the companies
having turnover above `50 Cr. (ii) Know your customer: After the customers are sourced by the bank or
the customer approach the bank, the initial and foremost step is to know the customer. For that some
documents and paper work is done. This includes audited balance sheet of the company mostly three
years along with the projected and estimated financials for the coming years, CMA report and a name
clearance form is to be filled. (iii) Initial Appraisal: When the CMA and the Name Clearance Form is filled
and submitted by the customer, bank usually do an internal rating and appraisal to have a fair amount of
idea about the credit worthiness of the customer. (iv) Company visit: This is done to know exactly how
the company is working and how it has maintained its machineries, tools etc. But the main purpose of
visit is to know why the loan is taken by the company, whether such requirement/request for loan is
required or not. Full inspection is done by the concerned officers (Relationship Manager and Branch
Head) of the bank and they take notes about the working conditions of the company. The officials of the
bank also match the details mentioned in the name clearance form and thus estimate the overall asset
of the company. (v) Preparation of CA note: If the company visit is satisfactory and the company is
performing according to credit norms of the bank then the CA is prepared. The most and vital
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documentation in the credit appraisal process is the preparation of the CA note. In this documentation
full appraisal of the company credit worthiness is done. Each and every financials is computed according
to norms and calculation is done to find the maximum permissible limits (explained in the case study). If
the loan limits exceeds the capacity of the branch then it is passed on to the subsequent higher
authority to scrutinize the sanction of loan. (vi) Scrutiny of the CA note: After the CA note is prepared
the sanctioning authority scrutinizes the note and boarding meeting is conducted to discuss the key
details of the proposal. The risk department is also asked to make an internal rating and the rating is
matched with the branch rating. In case of any discrepancies the branch is asked to give sufficient
explanation for the variability.
(vii) Sanctioning/Rejection of the Proposal: After thorough discussion and getting proper explanation for
discrepancies if any the sanctioning authority decide whether to sanction the loan or reject the loan. If
the bank approves the proposal then a sanctioning letter for confirmation is sent to the respective
company. (viii) Terms and conditions: After the sanctioning of the proposal certain terms and conditions
are stated by the bank and if the borrower agrees to accept the conditions then only the loan can be
sanctioned. Of course the terms and conditions can be negotiated. A sanction letter is sent to the
customer mentioning loanable amount and the details regarding term and conditions. (ix) Loan
Agreement: When the borrower accepts the term and conditions, the borrower sends an acceptance
letter to the branch head. (x) As mentioned in the terms and conditions within stipulated period of time
the borrower has create requite securities as first mortgage. Apart from that other conditions if
applicable or mentioned are to be followed such opening of Escrow account, directors guarantee etc.
(xi) Disbursement of loan: As per the requirement of borrower i.e. mentioned in the sanction letter, the
credit is provided to the borrower periodically both for term loan and working capital loan. (xii)
Monitoring: Periodically bank monitor the company to see whether the loanable amount is being
properly utilized as mentioned by the borrower.
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4.2 Financial Parameters to be assed:

The financial parameters based upon which the analysis of the borrowers credit worthiness are done
are mentioned below:
1. Sales 2. PAT 3. Paid up capital: 4. Reserves and surplus: 5. Tangible Net Worth: 6. Unsecured loans:
how to deal with unsecured loan is very vital. 7. Deferred tax liability or Assets 8. Current assets 9. Noncurrent assets 10. Current Ratio 11. Debt Equity Ratio 12. TOL/TNW 13. Contingent Liabilities 14. Lastly,
in case the company is going for expansion the bank monitors and estimates whether such a step will
decrease or increase the turnover of the company, whether the projected profit margin will be achieved
or not etc.
Compliance with the lending norms:
Particulars Corporate Finance/ SME Compliance or not
Profitability Continuous profit for the last 2 yrs
Credit history No known default by the company or group Promoter contribution Adequate margin
Interest coverage Minimum 2
DSCR Average 1.5 & each minimum 1
Leverage TOL/TNW of maximum 3:1 TOL/Adj.TNW of maximum 5:1
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Leverage for substantial exposure TOL/TNW of maximum 2:1 TOL/Adj.TNW of maximum 5:1 Current
ratio Minimum 1.33
Contingent liabilities Should not exceed borrowers net worth

Table 1

4.3 Assessment of Working Capital Sanction:

4.3.1 Fund based working capital sanction:
The following indicators are observed and analyzed during the sanction of working capital: (a) Sales: The
turnover of the company forms the basis of the initial decision for sanctioning of the loan. Basically the
sales trend is observed from the CMA given/submitted by the borrower. The trend suggests how the
company is performing of late. The estimated sales for the next year and the projected sales for the
coming years are also observed to have an idea about where the company is heading towards. (b) Raw
materials: For a manufacturing firm raw material forms the backbone of the company. Adequate
amount of raw materials are to be kept to meet the day to day demand and supply. Thus bank monitors
whether the company is able to meet its requirement. This indicates how well forecasting is done by the
company. Besides the company enthusiasm towards improvement is indicated. Bank minutely observes
the estimated and projected raw material of the company. By this manner bank can estimate what
company is thinking about the future demand and supply. (c) Stock in Progress: In case the stock in
progress is less, then it indicates the final product is done quickly and efficiently. Unnecessary
accumulation of stock in progress creates a hell lot of problems for the firms. Bank can estimate the cash
conversion cycle of the firm. In case of less stock in progress the cash conversion cycle is less which

indicates efficiency of the firm. Bank usually keeps track of the cash conversion cycle of the borrower.
(d) Finished goods: Finished goods should be kept at a desired level and that requite amount can vary
depending upon the demand or market trend. Bank also tracks the finished goods and observe the
inventory level of the company.
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If the finished goods are lying in the inventory then the bank asks for valid explanations for such
situation. Of course inventory is the current asset of the company but if it is lying idle for a considerable
period of time then it is not a good sign for the company and bank would not prefer to be associated
with the company. (e) Receivables: It is also a vital indicator while determining the working capital
assessment. Banks usually see the receivables of the firm in the previous FY year and the current
projected FY year. This helps to have an idea how much of credit the company has given and how much
is expected to realize this year. (f) Creditors: It is also important from bank prospective because it
indicates how much the company has to pay in future. Usually the credit history of the firm is analysed
by the bank. Depending upon the amount of creditors the sanction of loan amount is decided. If it is too
high then the bank will reject the proposal.

Treatment of other indicators:

(i) Export Receivables: These are given a maximum period of 180 days and on such export receivables no
margins are prescribed, yet 100% recovery is expected as such matters are closely kept under
surveillance of RBI. It may happen, if the bank has some policy, they are excluded from the current asset
while calculating the MPBF. But now if the firm is an exporter (main business) then it is included but 25%
of the current asset is calculated excluding the export receivables. According to RBI (detailed in
Appendix) banks were advised not to go for second method of lending for calculation of MPBF for those
exporter borrowers having credit export of more than 25% of their total turnover during the previous
accounting year, along with that they have a need for fund based working capital from bank less than `1
crore. RBI has also suggested that the units engaged in export activities need not bring in any
contribution from their long term sources for financing that portion of current assets as is represented
by export receivables. (ii) Money Margin: As per RBI norms bank excludes the money margin while
calculating the MPBF.
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(iii) Unsecured Loans: Treatment of unsecured loans is very vital form bank prospective. Credit taken
from the promoter, directors or partners of the company/partnership firm whether interest free or
interest bearing is generally shown under this head. Normally the amount specified is static and it can
also increase depending upon the firm but it can only decrease after consultation with the concerned
bank. Sometimes this amount can be treated as quasi equity but again bank monitors such entry. Again
in case the unsecured loans are more than the net worth of the company then it should be treated as
liabilities of the company. 4.4 POST SANCTIONING: After the sanction is made, banks job is still not
finished. Continuous monitoring is done after the sanction of loan. Thus post sanction is also a vital
Supervision by monitoring the transactions made in loan amou

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