meaning of loan policy
loan policy is A formal structure governing the sanctioning, monitoring and management of loans and advances In the bank.
Objective:
-
maintain solid credit portfolio
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to ensure risk-controlled lending
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maintain prudent risk limits
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align with rbi regulatory norms
-
maintain ethical lending practices
loan policy provides Overall framework for managing the Bank’s loan portfolio and product creation.
important points for exam
Loan Policy:
• reviewed annually by the board
• Implemented through Credit Policy and Procedure Committee (CPPC)
• applies to Domestic and International Operations
SBI uses it fragmented credit management structure.
major vertical group
| standing | Celebration |
|---|---|
| RBBO | retail loan |
| ccg | medium corporate customers |
| CAG | big corporates |
| IBG | international operations |
| S.A.R.G. | npa resolution |
| PF&S SBU | project finance |
| Abu | agricultural finance |
| FI and MC | financial inclusion |
These vertical structures help Manage credit risk and special loan segments.
high probability question
Which group handles stressed assets?
Answer: S.A.R.G.
Definition
exposure = The total credit risk of a bank to a borrower.
These include:
-
fund based credit
-
non-fund based loan
-
investment
-
derivative performance
is defined under Exposure Criteria and Credit Risk Concentration.
Types of exposure
fund based
Example:
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Term loan
-
cash loan
-
overdraft
non fund based
Example:
-
Bank guarantee
-
letter of credit
-
derivative performance
exposure limits
| borrower type | You LIMIT |
|---|---|
| single borrower | 20% of Tier 1 capital |
| group borrower | 25% of Tier 1 capital |
These limitations prevent excessive debt concentration.
key concept
Large borrower exposure is then defined as Total exposure ≥10% of Tier-1 capital.
Internal exposure roofs also apply.
| Borrower | maximum exposure |
|---|---|
| Person | ₹100 crore |
| Non-Corporate Entities | ₹250 crore |
These limits ensure diversification of credit risk.
credit assessment is The process of evaluating the creditworthiness of the borrower before approval.
evaluation phase
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originator valuation
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financial analysis
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industry analysis
-
security assessment
-
risk assessment
-
compliance verification
Credibility is assessed after considering Promoter background, group exposure, industry risk, financial strength and collateral coverage.
Key Elements in Evaluation
-
integrity of the borrower
-
technical feasibility
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economic viability
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financial feasibility
-
repayment capacity
methods used
1 turnover method
Working Capital Requirement:
25% of estimated turnover
Bank Finance:
20%
Borrower’s Contribution:
5%
2 Projected Balance Sheet Method
used for big debtors.
Based on evaluation:
-
current assets
-
current liabilities
-
net working capital
3 Cash Budget Method
used for:
SBI uses CRA model To evaluate borrower risk.
CRA considers:
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financial risk
-
industry risk
-
occupational exposure
-
management risk
-
external environment
CRA Rating Scale
| rating | Meaning |
|---|---|
| SB1-SB8 | strong debtor |
| SB9-SB15 | medium risk |
| SB16 | npa account |
CRA helps determine ratings Approval Decisions and Pricing.
risky borrowers above ₹50 crore Ratings must be obtained from recognized agencies such as:
-
CRISIL
-
ICRA
-
care
-
india ratings
working capital limits
Validity:
✔ 12 months
Annual renewal required.
If not updated
account can be created Irregular or NPA.
ad hoc limits
Validity:
✔ 90 days
Maximum extension:
✔ 180 days
term loan finance long term capital investment.
Example:
-
Plant and Machinery
-
infrastructure
-
housing loan
-
education loan
Tenure
Maximum Tenure:
✔ 30 years
Stoppage
Minimum Moratorium:
✔ 15% of project life
Before approving credit, the bank must verify:
-
KYC compliance
-
promoter background
-
credit bureau report
-
defaulter list
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CIBIL HISTORY
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financial statements
Loan proposal must be supported Request letter/application from the borrower and proper documentation.
The bank cannot give loan for the following:
Under the Banking Regulation Act:
Edge Cannot give loans to directors or entities where they have a substantial interest without approval.
Caution should be taken while giving loan to the bank:
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Sugar
-
Cereal
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oilseeds
-
cotton
Margin can be determined based on market risk.
account is created NPA when overdue is more than 90 days.
Types of NPA:
| Social class | Description |
|---|---|
| Junk | NPA <12 months |
| Suspicious | NPA > 12 months |
| loss property | unattainable |
Monitoring includes:
-
stock details
-
financial statements
-
inspection report
-
early warning signs
-
risk rating review
Digital loan products include:
These follow the automatic Business Rule Engine and Digital Monitoring System.
Major committees involved in loan decisions:
Credit Policy and Procedure Committee (CPPC)
Responsible for:
-
formulation of credit policy
-
product approval
-
credit guidelines
Corporate Center Credit Committee (CCCC)
Approves large loan proposals.
Executive Committee of the Central Board (ECCB)
approved very large debts and deviations.
| Subject | core values |
|---|---|
| single borrower exposure | 20% tier 1 |
| group show | 25% tier 1 |
| working capital turnover | 25% |
| Borrower’s Contribution | 5% |
| npa overdue | 90 days |
| ad hoc limit validity | 90 days |
| term loan period | 30 years |
Remember the following:
5 major credit risks
1 Industry Risk
2 Financial Risk
3 Managing Risk
4 Market Risk
5 Operational Risk
5 Steps of Credit Evaluation
1 Promoter Check
2 Financial Analysis
3 Industry Analysis
4 Security Assessment
5 Compliance Verification
1
Working capital under turnover method?
Answer: 25% of estimated turnover
2
Exposure limit for single borrower?
Answer: 20% of Tier 1 capital
3
Validity of working capital limit?
Answer: 12 months
4
When does an account become NPA?
Answer: 90 days overdue
5
Which group handles stressed assets?
Answer: S.A.R.G.
